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Secondary Market Bench Impact on Mutual Fund Industry
Dr. A Kotishwar
Performance evaluation theory stresses the importance of using good benchmarks (Holmstrom, 1979).
For example, when determining an airline CEO’s bonus, comparing the firm’s performance to that of
other airlines can improve efficiency by helping to filter out common stocks that are beyond the CEO’s
control. It would be less efficient to use railroads as the benchmark instead because shocks to the two
industries are not perfectly correlated, yet the CEO has an incentive to encourage the use of a railroad
benchmark if he believes that airlines are likely to outperform railroads. Of course, the attempt is unlikely
to succeed in this setting because a knowledge- able corporate board of directors will realize that railroads
are not the best benchmark. The financial services landscape is transforming, with a plethora of changes
taking place on the regulatory front. Against this backdrop, asset management companies (AMCs) realise
that they need to re-structure their businesses in order to meet the evolving needs of their clients and
provide them with complete investment solutions.