Fund Flows and Income Risk of Fund Managers

Joint with Xiao Cen, Leonid Kogan, Wei Wu

April 2023

Investment fund managers make asset allocation decisions on behalf of a significant segment of US households. To elucidate the incentives they operate under, as well as the income and career risks they face, we construct a unique and novel dataset, which encompasses detailed information on the compensation and career trajectories of managers within US active equity mutual funds. The dataset is the first-ever to contain such information, having been compiled based on the US Census Bureau's LEHD program and leveraging various ``big'' textual data sources. Our causal evidence indicates that, contrary to fund disclosures, managers' pay is primarily driven by Assets Under Management (AUM), with performance influencing compensation only via AUM. Fund flows, although they do not align with client interests, have a significant 6% positive impact on compensation for every one-standard-deviation increase. Systematic flow components impact base salaries, while idiosyncratic elements alter bonuses. Crucially, fund flows, as opposed to fund performance, exert a strong impact on the career outcomes of fund managers, especially concerning their downside career risk. Specifically, large fund outflows elevate a manager's likelihood of job turnover (with a substantial decline in income) by 4 percentage points.