Fraternal twins—Should investors be careful?*

Abstract

After analyzing portfolio differences between separate account‐mutual fund twins, we find that dissimilar “fraternal twins” show significantly lower joint performance than “identical twins.” This finding is consistent with fraternal twins competing for the limited attention of a manager while identical twins mutually profit. Furthermore, the effect is stronger for separate accounts, which is probably due to investors having the opportunity to influence managers’ investment decisions according to their preferences. These results are independent of differences in known investment constraints. However, the findings may be driven by separate account investors’ preferences for higher liquidity and lower idiosyncratic risk.

Which Should Be Your Top Pick, Separately Managed Accounts or ETFs?

“…Evans et al (2023) examined the diseconomies of scale for quantitative separate accounts (SA) and fundamental separate accounts and found that fundamental SAs show greater diseconomies of scale than quantitative SAs. Rohleder et al (2023) examined the portfolio difference between separate accounts and mutual funds twins from the same fund companies and found evidence of performance differences and they argued that the findings may result from the limited attention of the managers. Additionally, investors' influence on managers' investment decisions may also play a role in their findings.…”