In finance, agency theory deals with the problems and conflicts arising when a principal–agent relationship exists. The agent is hired by the principal and acts on the principal’s behalf. But how does the principal ensure that the agent always considers the interests of the principal first? What if the agent is working for his or her self-interests and not making the best decision for the principal? Essentially agency theory involves the costs of resolving conflicts between the principals and agents and aligning interests of the two groups.
The mutual fund managers act as agents for the principals, the investors in the mutual fund managed by the particular manager. What investment strategies are the managers following that allow them to be considered great in light of the recent financial crisis? What rules of agency theory are being utilized or are rules being ignored to allow these funds the success they have managed to gain? The research question relates to the mutual fund’s performance. What strategies have the managers followed to allow the fund to have above average performance in severe financial times? What is it about these funds that make them able to “weather the storm?”
Speaking to Cambridge Energy Research Associates, Nouriel Roubini, Professor of Economics and International Business at New York University, Kenneth Rogoff, Professor of Economics and Public Policy at Harvard University and Nariman Behravesh, Chief Economist and Executive Vice-President for IHS Global Insight all agreed that this is the worst financial crisis since the Great Depression. Rogoff described the current recession as “a once in a 50-year event.” Behravesh called this financial crisis the Great Recession.
Naimy (2008) reports that fifty-two million U.S. households and 88 million individuals invested in more than 8,100 mutual funds in 2006. The total investment was over $10.4 trillion. Based on the numbers, she states that mutual funds constitute a major financial asset for many investors and play a key role in today’s investing world. Investors can help accomplish their investment goals with the well established mechanics of mutual funds. She cites professional investment management as vital to achieving results in today’s complex markets. Mutual funds are a growth industry with many Americans’ financial future tied to the success and performance of this industry.
