The shadow architecture behind mutual funds

-The shadow architecture behind mutual funds: how organizational factors impact financial results-

Financial markets have a deep impact on people and organizations. Despite such crucial role, several aspects of how financial actors operate are still in the shadow. Our study investigates the architecture behind financial institutions: how mutual funds are managed? In particular, we analyze mutual funds to investigate their centralization levels and if and how this organizational factor impacts their performances. We build a dataset with over 6 thousand mutual funds and collected both organizational and financial variables in order to study the differences in their internal structure and how organizational choices impact financial performances. In particular, we found that organizational structure has a significant influence on portfolio construction, risk exposure and ultimately, financial returns in terms of alpha and total net asset value change.

We conducted our study in order to verify the impact of different organizational structures on mutual funds’ performance. We constructed a newly made dataset combining data from two different databases in order to count on both mid-cap funds’ financial variables and organizational dimensions. We empirically studied the effects of different management choices on portfolio characteristics and performance. After evidencing the significant differences in terms of distribution of organizational structures in the mid-cap mutual fund industry, where decentralized management is the predominant choice, we proceeded to investigate if funds with lower levels of centralization outperforms the more centralized ones. Through the evaluation of portfolio characteristics in terms of systematic risk, unsystematic risk, and number of holdings in portfolio we concluded that decentralized structures take on average less unsystematic risk compared to single and centralized managements and that systematic risk differences are not statistically significant. Also that the number of holdings in portfolio is significantly higher in the case of decentralized structure, supporting the idea that a decentralized structure is associated to more stocks buying while concentrating the decisional power in one or a few components of the management team results in less projects approved. These findings validate the hypothesis that decisions taken by a single or centralized structures and those taken by decentralized structures are significantly different.

We continued the analysis evaluating if there exists a correlation between level of centralization and performance, both in terms of risk adjusted returns and net asset value returns. The outputs of our regression models confirmed that decentralized structures tend to outperform the more centralized ones in similar proportion for both performance measures. These results may be the reasons why decentralized management structure is preferred in the mid-cap mutual fund industry. These findings are also coherent with the initial idea that team decisions benefit from reciprocal decisional error correction, and limit the negative effects of the individual bounded rationality. The skills diversification of specialist managers having superior knowledge on particular industries or asset classes may be beneficial for performance.

Although this study has evidenced some correlation between organizational dimensions and financial performance of mutual funds, we are aware of its limitations. First, the analysis was conducted on a relatively small sample, covering only one type of mutual fund. Second we considered only a few of the possible variables potentially impactful on performance, for example we consider portfolio dynamics, management fees and expenses and management turnover. Lastly, in order to further validate our results, we should test the hypotheses in bull, bear and sideways market trends, to observe the impact of organizational variables in different market conditions.


  1. Colella N.A., Bolici F. (2016). The Shadow Architecture Behind Mutual Funds: How Organizational Factors Impact Financial Results. European Group for Organizational Studies (EGOS). Accepted Paper