Mutual fund (sub)advisor connections and crowds

Some mutual fund families hire unaffiliated advisors outside of the fund family, called subadvisors to manage one or more of the family’s mutual fund portfolios. Subadvisors frequently manage funds for multiple fund families. We hypothesize that when a fund family hires two different advisors as subadvisors, the shared family (i.e., client) connection intensifies pairwise competition between the advisors, affecting portfolio decisions. We find (sub)advisor pairs managing funds for a common fund family exhibit greater similarity in their portfolio holdings and trades than non-connected (sub)advisors. Portfolio similarity increases following the establishment of a family connection. Inconsistent with information considerations influencing herding behavior, connected holdings earn lower risk-adjusted returns than non-connected holdings in the fund’s portfolio. We further show that this herding behavior among mutual fund subadvisors relates to stock volatility as stocks with high connected ownership levels exhibit greater volatility, on average, than those with low levels of connected ownership.