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The Relation Between Price and Performance in the Mutual Fund Industry
Abstract
Gruber (1996) drew attention to the puzzle that investors buy actively managed equity mutual funds, even though on average such funds underperform index funds. We uncover another puzzling fact about the market for equity mutual funds: Funds with worse before-fee performance charge higher fees. This negative relation between fees and performance is robust and can be explained as the outcome of strategic fee-setting by mutual funds in the presence of investors with different degrees of sensitivity to performance. We also find some evidence that better fund governance may bring fees more in line with performance. Copyright (c) 2009 the American Finance Association.
... Further, several authors have also argued the previous/expected fund returns have a significant and positive effect on investors' decisions (Sirri &Tufano,1998;Ivković &Weisbenner, 2009;de Mingo-López &Matallín-Sáez, 2017).From the above literature,it can be ascertained that the literature is not lacking on factors affectinginvestment decisions in mutual funds (Nagy &Owenberger, 1994;Levitt, 1998;Gil & Ruiz, 2009;Gillet al., 2011), yet, the majority of them have focused primarily on the qualitative aspect of problem-solving. It results in a grave need to justify this with empirical evidence to understand the influence of skills and perceptual aspects of investors on their investment decision,especially towards mutual-fund investment. ...
... The (perceived) expertise of the investor is one of the main characteristics that influence investment decisions. Gil & Ruiz (2009) pointed out that the equity-inve storrelationshipisinfluencedbytheexpertiseoftheireq uityinvestmentsaspartoftheir entire portfolio. Byron (2005) stated that better experience and knowledge in investing enable individual investors to choose or plan an optimum investment portfolio. ...
... The mutual fund investor who has good investment experience and a better understanding of risk information is able to comprehend the association between risk and return in investing mutual funds. Mutual fund investments (Gil & Ruiz, 2009) are more likely to be due to a better understanding of the risks and required returns on mutual fund investments. Barberet al. (2008) found that individual investors have interest-based buying behavior, and it is important for mutual fund investors to understand financial market data. ...
... We winsorize the top and bottom 1% of fund flow observations. We follow the literature (Christoffersen and Musto, 2002;Gil-Bazo and Ruiz-Verdú, 2009;Huang et al., 2007) to set up the following fund flow determinant model. Fund flows are positively driven by past relative performance, controlling for several fund characteristics (fund size, age, expenses, fund family size, and lagged flows). ...
... Literature on mutual funds shows that investors tend to overpay for fund performance (Adams et al., 2012;Choi et al., 2010), and there is a "price-performance puzzle," meaning that fund managers can strategically set higher fees despite poorer fund performance (Gil-Bazo and Ruiz-Verdú, 2009). The puzzle is mainly caused by fund managers' use of investors' high expectations for earnings, which corresponds to a significantly negative coefficient α 6M i,t in the regression model (2). ...
... Generally, the price-performance puzzle" of the infrastructure fund is rooted in differences in characteristics and strategies at the fund level, which makes fund flows less sensitive to fund expense ratios. It could be due to the abovementioned funds' expropriation of investors' high expectations for earnings (Gil-Bazo and Ruiz-Verdú, 2009), or funds with higher investment fees have higher allocations to assets that trade in more complex markets. 13 ...
... To determine a panel of monthly estimated alphas, I follow a two-stage estimation procedure that has been widely used in previous studies (Carhart, 1997;Gil-Bazo and Ruiz-Verdu, 2009, among others). ...
... However, most previous studies find a negative relation between fees and performance. For instance, Gil-Bazo and Ruiz-Verdu (2009) show that less-expensive funds are better performing than funds charging higher fees. Because loads can be negotiated and are often used to remunerate the fund's distribution, load fees would not have a significant impact on fund performance 7 . ...
Forthcoming in "Bankers, Markets and Investors"
Although European market regulators have implemented many measures in order to make the market more integrated, a recent report by the European Fund and Asset Management Association (EFAMA) in 2015 underlines that domestic actors remain principal participants in member countries. My research questions the integration of the European market by investigating the place of foreign promoters in continental European markets. Using 12315 equity funds from 14 continental European countries for the period from 2002 to 2014, I analyze the competitiveness and the market shares of foreign-promoted funds. The results show that foreign-promoted funds seem to be better performing than domestic-promoted funds. However, they do not attract more investors. Foreign promoters appear to have significantly smaller market shares. These results highlight the existence of barriers to foreign promoters in the European mutual fund market.
... The control variables in X p,t−1 include lagged TNA, expense ratio, turnover ratio, flows, fund age and fund returns. In addition, we include fund family-by-year fixed effects α j(p),t to account for time-varying fund family policies (e.g., Hortaçsu and Syverson 2004;Gil-Bazo and Ruiz-VerdÚ 2009;Guercio and Reuter 2014). Standard errors are clustered by both the fund and year, allowing for shocks to fees that commonly affect all funds as well as autocorrelated shocks within a fund through time. ...
... The segmented nature of the mutual fund market is one way to reconcile our findings with the diseconomies of scale results. Some argue that the market for retail funds is segmented, catering to two different types of clients (Gil-Bazo and Ruiz-VerdÚ, 2009;Guercio and Reuter, 2014). Empirically, our results are consistent with high-CO funds having more "sophisticated" investors who are more likely to leave when past returns are low and less likely to chase positive returns. ...
... Several mutual fund studies have attempted to determine whether mutual funds can consistently earn positive risk-adjusted returns. Although these research studies have documented significant differences in risk-adjusted returns across funds, it became apparent early on (Sharpe, 1966) that those differences were attributable largely to variances in fund fees (Gil-Bazo and Ruiz-Verdú, 2009). From a theoretical standpoint, in an efficient market, fees should be compatible with services provided by the fund and consistently reflect its portfolio management activities. ...
... From a theoretical standpoint, in an efficient market, fees should be compatible with services provided by the fund and consistently reflect its portfolio management activities. Accordingly, there should be a positive relationship between risk-adjusted expected returns and fees (Gil-Bazo and Ruiz-Verdú, 2009). However, despite the strong theoretical basis, often, authors have demonstrated otherwise, contravening the efficient market theory, as they found a negative relationship between fees and performance in the mutual fund industry. ...
Purpose
The paper aims to investigate the performance determinants of European non-listed private equity real estate funds between 2001 and 2014.
Design/methodology/approach
Using a sample of 363 funds collected from the Inrev database, the analysis evaluated the impact of fees and other intrinsic characteristics of these funds, such as leverage, size and duration, on the funds’ performance, intending to enhance the understanding underlying their relationship.
Findings
The findings show a negative relationship between the return of the funds and redemption fee, performance fee and management fee. Conversely, marketing fees have a positive effect on performance. When analyzing the investment style, the results reveal inhomogeneous behaviors of leverage on funds’ performance. This variable has a positive impact on the return in core funds, while there is a negative relationship in value-added investments. Finally, the emphasis on the global financial crisis shows that the effects of the independent variables on the performance do not significantly change in different economic cycles.
Practical implications
The practical implication of the research is to understand whether an investor can direct its resources in a fund, leveraging on certain intrinsic characteristics that can be observed a priori.
Originality/value
Even if there is a considerable body of literature on determinants of performance in European non-listed real estate funds, little research has analyzed the role of fees in driving their results. Besides, this paper takes advantage of observations from different investment styles to emphasize the impact of higher or lower risk profiles and from the full economic cycle to understand the effects of the crisis period.
... First, management fees can affect fund performance. The relationship between fees and performance in the mutual fund industry has been well analyzed by literature (Chevalier and Ellison, 1999;Gil-Bazo and Ruiz-Verdu, 2009). Investors who pay for management services expect the prices they pay to be reflected by the quality of the services or fund performance they receive. ...
... However, most studies find a negative relationship between fees and performance. For instance, Gil-Bazo and Ruiz-Verdu (2009) show funds that charge lower fees perform better than funds that charge higher fees. Accordingly, we add the control variable fees, which we measure as a percentage of a fund's assets under management. ...
Most studies on mutual fund outsourcing have focused on the U.S. market. The objective of our study is to investigate the determinants of the decision to outsource and the impact of outsourcing on fund performance in the European market. The European market differs from the U.S. one in terms of market structure. In the U.S., banks play a minor role while the situation in Europe is the opposite: Banks dominate the market, and independent companies play minor roles. This difference in market structure can impact both the decision to outsource and the relationship between outsourcing and fund performance. In the U.S., banks and insurance companies that do not specialize in portfolio management tend to outsource their portfolio management services to external management companies. In Europe, banking and insurance groups often have management companies integrated into their groups, allowing them to keep their portfolio management in-house. In terms of fund performance, in contrast to recent studies based on the U.S market, our results show that outsourced funds perform at least as well as in-housed funds. They are even more performing than in-house funds in the short term.
... More specifically, for all share classes available before 2003 we follow the approach suggested by Gil-Bazo and Ruiz-Verdú (2009) and exclude all share classes that contain specific keywords indicating passively managed funds. Beginning in 2003, we use the corresponding identifier provided by CRSP to select these share classes. ...
... The management fee is generally charged for all funds intended for the final shareholder and " [...] remunerates the manager for the services of administration, portfolio management, and others needed for operating the fund" (Comissão de Valores Mobiliários [CVM], 2014, p. 24). Thus, studies point out that the performance differences obtained by fund investors can also be derived from the difference in the amounts of funds' management fees (Gil-Bazo & Ruiz-Verdú, 2009;Grinblatt & Titman, 1989;Milani & Ceretta, 2013;Vidal et al., 2015), emphasizing that they may be responsible for negatively affecting the net return obtained by shareholders (Grinblatt & Titman, 1989;Parida & Tang, 2017). ...
This article analyzes the influence of industry competition and investor sentiment on the likelihood of change in investment fund management fees in Brazil. Due to the wide variety of existing funds, with various characteristics and objectives, there may be significant differences in the fees observed. Thus, it is worth analyzing the factors that influence the amount of fund management fees charged, since the literature highlights that the payment of fees is related to fund performance. Also, it is observed that the Brazilian fund industry, despite having a large number of available funds, is still concentrated in few management firms, which is an indication that there is a low competition level. In practical terms, this investigation may be useful to investors in the fund selection process, since the management fee represents one of the main costs an investor faces when investing in this industry. The results point out the importance of adopting greater transparency in the disclosure of fees by financial institutions, since there are indications that the amounts charged are influenced by the characteristics of funds and investors. The methodology adopted involves Logit/Probit regression models, which had changes in the management fee as an explained variable and, as explanatory variables, the proxies of competition and investor sentiment, in addition to other control variables. It was observed that the investor sentiment proxy was significant in explaining the probability of change in management fees, mainly for setting higher fees. However, no statistical significance was observed for industry competition. This research innovates by analyzing the role of industry competition and investor sentiment on the probability of changing management fees, thus contributing to fill a gap found in the Brazilian national literature.
... The management fee is generally charged for all funds intended for the final shareholder and " [...] remunerates the manager for the services of administration, portfolio management, and others needed for operating the fund" (Comissão de Valores Mobiliários [CVM], 2014, p. 24). Thus, studies point out that the performance differences obtained by fund investors can also be derived from the difference in the amounts of funds' management fees (Gil-Bazo & Ruiz-Verdú, 2009;Grinblatt & Titman, 1989;Milani & Ceretta, 2013;Vidal et al., 2015), emphasizing that they may be responsible for negatively affecting the net return obtained by shareholders (Grinblatt & Titman, 1989;Parida & Tang, 2017). ...
This article analyzes the influence of industry competition and investor sentiment on the likelihood of change in investment fund management fees in Brazil. Due to the wide variety of existing funds, with various characteristics and objectives, there may be significant differences in the fees observed. Thus, it is worth analyzing the factors that influence the amount of fund management fees charged, since the literature highlights that the payment of fees is related to fund performance. Also, it is observed that the Brazilian fund industry, despite having a large number of available funds, is still concentrated in few management firms, which is an indication that there is a low competition level. In practical terms, this investigation may be useful to investors in the fund selection process, since the management fee represents one of the main costs an investor faces when investing in this industry. The results point out the importance of adopting greater transparency in the disclosure of fees by financial institutions, since there are indications that the amounts charged are influenced by the characteristics of funds and investors. The methodology adopted involves Logit/Probit regression models, which had changes in the management fee as an explained variable and, as explanatory variables, the proxies of competition and investor sentiment, in addition to other control variables. It was observed that the investor sentiment proxy was significant in explaining the probability of change in management fees, mainly for setting higher fees. However, no statistical significance was observed for industry competition. This research innovates by analyzing the role of industry competition and investor sentiment on the probability of changing management fees, thus contributing to fill a gap found in the Brazilian national literature.
... Management fees play an important role in mutual fund performance (Gil-Bazo & Ruiz-Verdú, 2009), especially for specialized funds such as SRI (Gil-Bazo et al., 2010). Therefore, we control for the effect of fees on SRI ETFs' returns. ...
... Fewer studies are related to relation between performance and fees (Gil-Bazo & Ruiz-Verdú, 2009;Díaz-Mendoza, López-Espinosa & Martínez, 2014;Corzo Santamaría, Martinez de Ibarreta & Rodriguez Calvo, 2018;Fraś, 2018;Cooper, Halling & Yang, 2021;Sheng, Simutin & Zhang, 2021). The studies on the relation between performance and fees revealed a negative relation between the expense ratio and the future performance. ...
The research aimed to check whether investment fund managers maintain costs similarly from period to period. The research verified the hypothesis that managers maintain costs in the subsequent periods at a similar level. The study used a method based on contingency tables which are used to analyse the persistence of performance. In this study, we replaced performance with costs, assuming that managers also control these values. Costs were defined as: (1) total costs, (2) total costs minus management fees and (3) active management costs (expressed as the active expense ratio). Based on the results obtained, it should be stated that managers maintain costs at a similar level from period to period in the case of the split using the median. On the other hand, the results indicate that the costs were not maintained at a similar level in subsequent periods when broken down into quartiles. Considering the detailed results for funds divided into quartiles, it is clearly visible that most managers keep the costs close to the average value. Less frequently, costs from period to period are changed to be allocated to the extreme quartiles. JEL classification: G11, G14, G23
... The fixed effect F-statistic and the Breusch-Pagan tests indicate that fixed effect and random effect models are better than the pooled regression. The results indicate that the net expense ratio is negatively and significant related to the fund size and age, suggesting that larger and older funds charge lower net expense ratios, consistent with the empirical evidence obtained in the conventional mutual fund literature, which shows the existence of economies of scale and economies of learning in mutual fund administration (see, among others, Latzko, 1999;Khorana et al., 2009;Gil-Bazo and Ruiz-Verdú, 2009;or Navone and Nocera, 2016). Regarding the Text uniqueness SR strategies variable, the estimated coefficient is positive and significant, indicating that more differentiated SR funds in a SR strategy can charge higher fees. ...
In this study, we analyse the effect of product differentiation on prices and clients’ attraction in the socially responsible (SR) mutual fund industry. Using three proxies for differentiation, including a text-based indicator, a return-based indicator, and a portfolio-holding indicator, we analyse a sample of US SR equity mutual funds in the period 1999–2019. Our findings show that the text differentiation measure better explains the product differentiation impact on prices and flows than the measures based on funds’ characteristics. Our text differentiation results indicate that younger SR funds and funds belonging to smaller families are more differentiated. In addition, differentiation allows SR funds to charge higher fees and attract more money flows. Finally, our results indicate that SR fund investors are sensitive to differentiation regarding other funds implementing the same SR strategies, but not in relation to other funds in the same Morningstar financial style category.
... Furthermore, we find that only the SRI ETFs that incorporate Inclusion (positive screening)and in particular, those that employ the Environmental Inclusion strategy -are drivers of abnormal returns. Given that management fees plays an important role in mutual funds performance (Gil-Bazo and Ruiz-Verdú, 2009), especially for specialized funds like SRI ( Gil-Bazo et al., 2010), we control for the effect of fees on SRI ETFs' returns and find that all our main results remain unaffected. ...
Using a unique and extensive dataset of 121 socially responsible investing (SRI) equity exchange-traded funds (ETFs) from January 2010 to December 2020, this paper studies how passive SRI ETFs perform in comparison to their non-SRI benchmarks. Over the full sample period, our results show that an equally weighted SRI ETF portfolio under-performs its benchmark portfolio. Further, on examining how the two portfolio performs in the second half of our sample period, we find no significant difference between them. Moreover, in the last two years, we find that the SRI ETF portfolio significantly outper-forms the benchmark. We also show that positive screening (or, inclusion) rather than negative screening (exclusion) is the ETF investment strategy that can beat the benchmark portfolio. In particular, the environmental inclusion screens provide significantly large abnormal returns. Lastly, we find that increasing competition and declining market concentration is important for SRI ETFs' performance.
... To the extent that plan investors chase performance, we expect return-flow sensitivities to increase around the disclosure reform. Whereas there is some evidence that high-fee funds on average exhibit inferior long-term net performance (e.g., Gil-Bazo and Ruiz-Verdu (2009) and Fama and French (2010)), evidence on whether there is persistence in fund performance is more mixed (e.g., Grinblatt and Titman (1992), Hendricks, Patel, and Zeckhauser (1993) Carhart (1997), Bollen and Busse (2005), Fama and French (2010), and Berk and van Binsbergen (2015)). ...
... To illustrate this point, Warren Buffet famously bet in 2007 against hedge fund managers that most funds will underperform the S&P500 index over a 10-year period after fees -he won the bet by a huge margin (Buffett 2017;Floyd 2019). This should not come as a surprise to anyone remotely familiar with the academic literature on mutual fund performance since Jensen's (1968) seminal paper, after which studies upon studies have shown that hedge funds reliably underperform index funds, in many cases so badly that they barely outperform the risk-free rate of government bonds, with the worst-performing hedge funds often charging the highest fees (Amin & Kat 2003;Baks et al. 2001;Chen et al. 2004;Cumby & Glen 1990;Dichev & Yu 2011;Gil-Bazo & Ruiz-Verdú 2009). ...
In response to the bleak prospects of today’s financial markets, a wave of financial and technological innovations emerges, bringing about potential benefits but also new challenges. For instance, tokenized securities are a new kind of blockchain-based asset enabling price stability, programmability, pseudonymity, and transaction efficiency, while also introducing new regulatory challenges and uncertainties. Conversely, index funds are an established investment device enabling broad diversification in a cost-effective, tax-efficient, and transparent way, while potentially also contributing to concentration of market power, intermediation cost, access barriers for underbanked or impoverished investors, increased market volatility, and human behavioral challenges. This paper conceptually develops Tokenized Index Funds as a hybrid approach that combines the benefits of tokenized securities and index funds while alleviating some of their drawbacks. Based thereupon, a corresponding multidisciplinary research framework is presented, with sample research questions along the activities of design and features, business and economics, management and organization, and law and regulation.
... Embora não haja consenso na literatura, a maior parte das evidências suporta a existência de uma relação negativa entre os custos e o desempenho dos fundos (Carhart, 1997;Dahlquist et al., 2000;Otten & Bams, 2002;Gil-Bazo & Ruiz-Verdu, 2009;Ferreira et al., 2013). Essa relação justifica-se tanto pelo fato de que os custos de transação corroem o desempenho líquido proporcionado pelos fundos (Grinblatt & Titman, 1989;Carhart, 1997), como também estão negativamente relacionados com a proteção do investidor (Khorana, Servaes, & Tufano, 2009). ...
Este artigo tem como objetivo investigar possíveis determinantes da habilidade de market timing (HMT) dos investidores de fundos de ações no Brasil, com base nas características específicas desses fundos. A amostra foi composta por 570 fundos de ações, compreendendo todas as classes, durante o período de 01 de janeiro de 2010 a 30 de setembro de 2015. A análise foi realizada por meio de regressão quantílica, cuja variável dependente foi uma medida da HMT que representa a lacuna de performance entre o desempenho proporcionado pelos fundos de ações e o retorno efetivamente auferido pelos investidores (Friesen & Sapp, 2007; Hou, 2012). Como variáveis explicativas, foram selecionadas características dos fundos, como idade, tamanho do fundo, tamanho da família do fundo, taxas de administração e de performance, período de lockup e taxa de crescimento dos fluxos de caixa. Os resultados indicam que há relação negativa entre a lacuna de performance e o tamanho dos fundos, ou seja, os fundos maiores tendem a atrair investidores com boa HMT, sendo capazes de superar o desempenho proporcionado pela gestão dos fundos. Em contrapartida, a lacuna de performance foi maior nos fundos com maior lockup e com maiores taxas de crescimento dos fluxos de caixa, isto é, quanto maior o período de carência para resgate e a taxa de crescimento dos fluxos de caixa, mais os investidores comprometeram sua rentabilidade em decorrência das decisões de timing. Portanto, o tamanho dos fundos, o período de lockup e a taxa de crescimento dos fluxos de caixa constituem potenciais determinantes da HMT. Os resultados foram consistentes com um teste de robustez cuja variável dependente foi o retorno da cota dos fundos.
... This means that, in our sample, SRMFs that were larger, older, with lower turnover and net expense ratios and with more stable daily returns, display higher sustainability scores. These results reveal that the more consolidated SRMFs seem to achieve better sustainable performance, suggesting that the economies of scale and economies of learning detected in mutual fund administration (Latzko, 1999;Khorana et al., 2009;Gil-Bazo and Ruiz-Verdú, 2009;and Navone and Nocera, 2016) also work in the case of the sustainable performance of SRMFs. ...
Purpose
This study aims to examine style-deviation practices in the socially responsible mutual funds (SMRF) industry i.e. how mutual funds game their stated financial objectives to earn a higher relative performance ranking. In addition, the consequences of such practices on sustainable scores and money flows are studied.
Design/methodology/approach
A sample of 454 US equity SRMFs is studied. This paper uses panel regressions controlling for time and style fixed-effects.
Findings
This study finds that 17.60% of SRMF managers in the sample are engaged in style deviation practices. These practices positively impact the sustainable performance of SRMFs and negatively impact their financial performance. One effect offsets the other and they consequently do not affect money flows. Another finding is that only investors with lower portfolio sustainability scores do show return-chaser behaviour.
Practical implications
This paper reveals that SRMF managers deviating from their stated financial style face a dilemma that is non-existent for their conventional peers that is style deviation practices affect financial and sustainable performance in opposing ways, whereas SRMF investor utility depends positively on both dimensions. The findings are not conclusive about the effectiveness of style deviation practices in attracting SRMF money flows.
Social implications
SRMF industry has experienced tremendous growth in the past decade. The increased competition in this industry has led managers to strive to attract investors, sometimes by relying on irregular practices that enhance their portfolio results. Regulators should consider how to avoid such perverse behaviour with a view to improving mutual funds transparency.
Originality/value
This is the first research that analyses style deviation practices and their consequences for the SRMF industry.
... Additionally, using a sample of American mutual funds, Gil-Bazo and Verdú (2009) observed that the funds with the worst performance charged higher rates. This phenomenon was more pronounced in the sample of funds destined for less qualified investors. ...
This paper investigates if opacity (as measured by derivatives usage) creates value for investors and the managers of hedge funds that charge performance fees. Since we do not identify a positive relation between opacity and managers’ revenue, it is not possible to state that opacity is a source of manager’s value creation for hedge fund investors and managers. However, considering that opacity is positively associated with risk-taking and negatively related with investors’ adjusted returns, we suggest policies aiming at protecting investors, especially those less qualified. We examine a unique and comprehensive database related to the positions in derivatives taken by managers, which was enabled due to specific disclosure regulatory demands of the Brazilian Securities Exchange Commission, where detailed information on hedge funds’ portfolio allocation should be provided on a monthly basis.
... To the extent that plan investors chase performance, we expect return-flow sensitivities to increase around the disclosure reform. Whereas there is some evidence that high-fee funds on average exhibit inferior long-term net performance (e.g., Gil-Bazo and Ruiz-Verdu (2009) and Fama and French (2010)), evidence on whether there is persistence in fund performance is more mixed (e.g., Grinblatt and Titman (1992), Hendricks, Patel, and Zeckhauser (1993) Carhart (1997), Bollen and Busse (2005), Fama and French (2010), and Berk and van Binsbergen (2015)). ...
We examine the effects of a 2012 regulatory reform that mandated fee and performance disclosures for the investment options in 401(k) plans. We show that participants became significantly more attentive to expense ratios and short-term performance after the reform. The disclosure effects are stronger among plans with large average contributions per participant and weaker for plans with many investment options. Additionally, these results are not driven by secular changes in investor behavior or sponsor-initiated changes to the investment menus. Our findings suggest that providing salient fee and performance information can mitigate participants' inertia in retirement plans.
Az MI-technológiák gyors fejlődése és elterjedése számos etikai kérdést vet fel, amelyek alapos vizsgálatot és szabályozást igényelnek. Jelen tanulmány célja az MI alkalmazásával kapcsolatos legfontosabb társadalmi és etikai aggályok feltérképezése és ismertetése. A tanulmány az MI-technológiák etikai dilemmáit két fő területre osztja: előítéletesség és diszkrimináció, valamint munkavállalók áthelyezése és gazdasági egyenlőtlenségek. Az MI-rendszerek gyakran továbbviszik a tanító adatokban meglévő torzításokat, ami igazságtalansághoz vezethet a társadalom különböző csoportjai között. Emellett az MI automatizálása jelentős munkahelyvesztést és jövedelmi egyenlőtlenségeket eredményez, mivel a technológiai előnyöket főként a nagyvállalatok és a magasan képzett szakemberek élvezik. A tanulmány számos példát mutat be az MI alkalmazásának etikai kihívásaira, és javaslatot tesz a szabályozási keretek és etikai normák kidolgozására.
This paper investigates the relationship between growth and quality of pension funds. It measures growth in terms of changes in the number of participants and cash flow transfers and appreciates the quality of the funds through the set of information on past results and costs published in the official prospectuses. The results show that growth rewards the best performing funds in the long term, while annual performance and costs have no relevance. Nevertheless, other factors, such as market power and commercial pressure, appear to be more powerful. The existence of conditions of market power capable of attracting investors beyond the actual quality of pension products is undesirable as it harms future pensioners. These results have implications for the Authority, as mandatory information should be suitable to induce investors to identify the best products and direct individual choices toward the public objective of a more efficient market.
Purpose
In modern societies, consumer well-being is dependent on choices regarding complex services, such as investments, health care, insurance and lending. However, evaluating costs of such services is often difficult for consumers due to a combination of limited cognitive resources and complexity of the service. The purpose of this study is to empirically examine to what extent three specific consequences of complexity influence consumer tendencies to make mistakes when evaluating the costs (or price) of complex services.
Design/methodology/approach
Three studies were conducted (survey: n = 153, experiment: n = 332 and conjoint analysis: n = 225), all focusing on how consumers evaluate costs in the complex mutual fund setting.
Findings
The authors find that consumers struggle with estimating and using cost information in decision-making in the complex services setting. Consumers of complex services frequently underestimate the costs over the long-term, may see costs as a signal of service quality and are susceptible to influence from presentation formats when evaluating costs.
Research limitations/implications
The study investigates mutual funds, which is one example of a complex service. In order to get a full picture of how consumers deal with costs in complex setting, future research needs to expand this focus to other types of complex services.
Practical implications
The results have implications for both marketers of complex services and policymakers. For marketers, this paper highlights that competing with a low-cost strategy may be difficult in the complex services setting as consumers may lack the ability to actually evaluate what they pay over the long term. For policymakers, increased simplification of prices may be an attractive option. However, it is important that this simplification is done in a way that increases the possibility to compare prices.
Originality/value
As complexity influences several aspects of decision-making, an understanding of how consumers evaluate costs in complex settings is dependent on taking a multidimensional research approach. This paper makes a novel contribution to the literature on pricing by showing that consumers struggle with multiple aspects when evaluating costs in complex contexts. Understanding these effects is important to policy, as well as to research on the cognitive value of simplicity that is currently gaining traction in marketing research.
Existing research shows that mutual fund flow is highly correlated with past performance in an asymmetric way, namely flow-performance convexity. Given such convex relationship, fund managers have incentives to manipulate fund characteristics to invoke future fund inflows. The main objective of this study is to conduct an empirical analysis of the impact of fund volatility and fee structures on the flow-performance relationship throughout the global financial crisis (GFC) period for U.S. open-end actively managed equity funds. Using sample data covering the period of 1999 to 2011 (disaggregated into three sub-sample periods), empirical analysis in this study show that mutual funds adopt a low risk strategy resulting in the greatest flow-performance sensitivity, which is convex. An incremental dampening effect is observed on flow-performance convexity due to increasing riskiness of portfolios, more significant in the GFC period but relatively less pronounced in the pre-GFC period. In addition, the results indicate that pure operating expense weakens the flow-performance sensitivity, especially in the post-GFC period. However, advertising effects provided by 12b_1 expense triggers greater investor response to past performance, particularly in the GFC period. It is also found that front-end load is not a statistically significant variable in determining the flow-performance relationship, nevertheless, back-end load on average dampens investor response to past performance and this dampening impact is more evident in the post-GFC period.
We provide a Bayesian learning model in hedge fund performance. Our modelling provides a novel Bayesian aspirational model for panel data that is stable across different priors as reported from the mapping of the prior to the posterior of the Bayesian baseline model with the adoption of different priors. The parameters of our learning equation are time-varying which, to the best of our knowledge, is only addressed in Hu et al. (Strat Manag J 38:1435–1454, 2017) who assumed that the parameters have time and individual effects and depend on observed covariates. Our data set comes from the Lipper Trading Advisor Selection System database which includes data on performance and types of assets under management. Results reveal that a higher initial share price, management fee, leveraged and redemption notice period had a negative effect on learning. The learning curve has a U-shaped relationship, specifically, learning improves over the first three years, and gradually declines to zero by the eight-year. The second stage of analysis shows that though mean levels of learning do not directly influence performance, a higher standard deviation in learning lowers the decline in performance with higher mean learning. But, we report variability in results across various models that we test for robustness.
Considering the institutional factors of the German mutual fund market, we analyze equity fund holdings of German retail clients who received financial advice between 2005 and 2014 to investigate whether those investors overweight the bank-affiliated asset manager and if so, whether this bank-affiliated asset manager bias leads to higher fees, i. e. Total Expense Ratios. Our analysis clearly indicates the presence of large bank-affiliated asset management biases for clients of all different banking sectors. Thus, German retail clients follow the biased financial advice they receive from their bank. Surprisingly, this bank-affiliated asset manager bias significantly reduces portfolio costs measured via mutual fund fees. Therefore, German banks disproportionately promote products of bank-affiliated asset managers but this biased advice does not lead to higher portfolio costs.
This study contributes to the academic literature on faith-based mutual funds, by offering a comparative investigation of Islamic vs. conventional funds’ performance sensitivity to changes in a list of seventeen relevant funds’ attributes, all in the context of the Saudi market. The performance measures investigated are the excess return, selectivity and timing. The study took place from 2011 to 2015, with a sample of 200 Active Saudi funds, 137 Islamic and 63 conventional. Findings indicated that fund size, management fees, expense ratio cash and price-earnings ratio were irrelevant to both Islamic and conventional fund performances. In addition, we noticed similarities in both Islamic and conventional funds’ performances sensitivities towards turnover, unsystematic risk, investment target, past performance, age and management tenure. They however react differently towards a change in the price-to-book ratio. On the other hand, fund systematic risk, cashflow-to-book ratio and faith factors are exclusively relevant to Islamic funds, while fund growth and objective only affect conventional fund performance. Finally, selectivity and timing appear to be mutually exclusive, suggesting management specialization. This work appears to be the first comparative analysis of its kind. A larger, multi-regional sample, and a longer study period will provide better insights.
We evaluate investors' learning from past fund performance and subsequent capital allocation decisions in mutual funds in an emerging market setup. We find that investors in India learn more about funds' ability to generate excess returns from past funds’-family performances. We explore two possible channels, common skill effect and negative correlation effects, through which investors observe fund-family performance and its impact on future fund flows. We observe that fund-family performance dominates individual fund performance when the common skill effect is stronger than the negative correlation effect. Our findings suggest that investors can use fund-family resources to understand funds' alpha-generating skills. Overall, our result highlights the new learning perspective of Indian fund investors.
We use the Grossman \& Stiglitz (1980) framework to build a reference portfolio for uninformed investors and employ this portfolio to assess the performance of actively managed equity mutual funds. We propose an empirical methodology to construct this reference portfolio using the information on prices and supply. We show that mutual funds provide, on average, an insignificant alpha of 23 basis points per year when considering this portfolio as a reference. With the stock market index as a proxy for the market portfolio, the average fund alpha is negative and highly significant, --128 basis points per year. The results are robust when considering various subsets of funds based on their characteristics and their degree of selectivity. In line with rational expectations equilibrium models considering asymmetrically informed investors and partially revealing equilibrium prices, our study supports that active management adds value for uniformed investors.
The purpose of this article is twofold. Empirically, the author uses a unique set of data in an emerging market
(Egypt) to re-assess the inter-correlation between mutual fund governance, performance, fee structure, and
stock selection and market timing of the fund managers' pre-and-post 2007-2008 financial crises.
Methodologically, the author develops a Structural Equation Model to systematically address the endogeneity
problem. The author contributes to the literature in two aspects. Firstly, the author identified some special
features that only exist in developing countries. Secondly, the author answers the research question in an
integrated and holistic way, so it bridges the three seemingly separate strands of literature on fund
governance, performance and fees. The results are relevant to the misconduct of corporate governance rules
in Egypt. Overall, the financial crisis demonstrates a need for enforcing the application of the regulations of
the Egypt Code of Corporate Governance to increases the firm value.
This paper investigates dynamic interaction between mutual fund fees, board structure, and performance. This paper provides an unbiased estimate of a structural equation model taking endogeneity into account. This paper provides an empirical assessment of the possible conflicts of interest in respect of different types of fund fee structures in the Egyptian mutual fund industry. Experimental results show a significant negative relationship between the expenses ratio and fund performance. Given the important role of mutual fund industry in Egypt, this is the first study of its kind explores the causality between fees, board structure, and performance in the mutual fund.
This study investigated association between tax-burden and mutual funds performance from both a theoretical and an empirical perspective. The results of this study show that the performance of Pakistani mutual open ended funds is related to their tax burden. And also tax-efficient funds have better performance due to favorable investment style, lower trading costs, and better selection of stocks. This study analyzed the data of 211 Pakistani open ended mutual funds from 2014 to 2017. The results provide current mutual funds performance analysis, which is useful for individual investors, institutional investors and asset management companies. The fund managers can also get help from this research while watching investors as well as funds own interests.
This study investigated association between tax-burden and mutual funds performance from both a theoretical and an empirical perspective. The results of this study show that the performance of Pakistani mutual open ended funds is related to their tax burden. And also tax-efficient funds have better performance due to favorable investment style, lower trading costs, and better selection of stocks. This study analyzed the data of 211 Pakistani open ended mutual funds from 2014 to 2017. The results provide current mutual funds performance analysis, which is useful for individual investors, institutional investors and asset management companies. The fund managers can also get help from this research while watching investors as well as funds own interests.
Hedge funds that endorse the United Nations Principles for Responsible Investment (PRI) underperform other hedge funds after adjusting for risk but attract greater investor flows, accumulate more assets, and harvest greater fee revenues. Consistent with an agency explanation, the underperformance is driven by PRI signatories with low ESG exposures and is greater for hedge funds with poor incentive alignment. To address endogeneity, we exploit regulatory reforms that enhance stewardship and show that the ESG exposure and relative performance of signatory funds improve post reforms. Our findings suggest that some hedge funds endorse responsible investment to pander to investor preferences.
The standard portfolio approach assumes that investors maximize expected utility, and that the Markowitz mean–variance standard portfolio optimization approach can be applied. Behavioral research, however, indicates that investors’ behavior with respect to risk or uncertainty is not consistent with expected utility. Notably, decision makers transform probabilities. Most of the academic literature integrating those aspects, however, focuses on so‐called financial market anomalies but does not focus on the structural impact those behavioral aspects might have, notably in terms of industrial organization of the asset management industry. This paper provides a survey of the asset management industry and argues that the architecture of the asset management industry is inconsistent with the standard expected utility framework. The origin of the industrial organization of the asset management industry stems from the convexity of the flow–performance relationship, which is due to prospect theory effects. The convexity of the flow–performance relationship explains the inflation of mutual funds and fund families, a phenomenon inconsistent with the Mutual Fund Separation Theorem.
In the first chapter, co-authored with Dr. Christian Julliard, we study the impact of option expiration on underlying stock volatility. We find a negative direct effect on stock realized volatility and a positive and significant effect on stock implied volatility. Moreover, a positive spillover effect on stocks with no options expiring on a given expiration date is observed. Two possible explanations are discussed, namely investors’ delta hedging and stock pinning around option expiration dates. Both seem to affect stock volatility. Finally, we implement a trading strategy that takes advantage of these findings. The second chapter studies the investment behaviour of mutual funds during financial bubbles. I find that mutual funds over-invest in bubble sectors during the run-up and withdraw money right before the collapse. This result is robust across different benchmark specifications and across fund styles. I also document that this strategy generates a positive and significant alpha (4% on an annual basis), with respect to both a risk-neutral expectation and the Fama-French factors. The paper provides evidence supporting the theory that mutual funds ride the bubble rather than causing it. It also demonstrates that mutual fund holdings can predict the future returns of a sector over a short to medium horizon. Building on the previous findings, the third chapter studies the fee setting behaviour of mutual funds during financial bubbles. It shows that, besides the well-documented persistence of fees, mutual funds charge higher fees during price run-ups. Two theoretical models support the finding: the first shows that investors’ sensitivity to fees decreases during bubble episodes, while the second demonstrates that the increase in fees translates into a higher mark-up over marginal cost.
This paper investigates how volatility of performance affects the sensitivity of mutual fund flows to past performance, and examines how investor learning may contribute to this effect. We illustrate theoretically that when sophisticated investors learn from past fund performance to form their posterior expectations of managerial ability, the flow-performance sensitivity should be weaker for funds with more volatile past performance. Moreover, the dampening effect of performance volatility on the flow-performance sensitivity should be stronger for funds attracting more sophisticated investors. We provide supporting evidence for this investor learning hypothesis using mutual fund flows and demonstrate variations in the volatility dampening effect across funds with differing levels of sophistication among investors, such as load versus no-load, high-expense versus low-expense, retail versus institutional, and star versus non-star funds.
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Mutual funds hold 32% of the U.S. equity market and comprise 58% of retirement savings, yet retail investors consistently make poor choices when selecting funds. Theory suggests poor choices are partially due to fund managers creating unnecessarily complex disclosures and fee structures to keep investors uninformed and obfuscate poor performance. An empirical challenge in investigating this “strategic obfuscation” theory is isolating manipulated complexity from complexity arising from inherent differences across funds. We examine obfuscation among S&P 500 index funds, which have largely the same regulations, risks, and gross returns but charge widely different fees. Using bespoke measures of complexity designed for mutual funds, we find evidence consistent with funds attempting to obfuscate high fees. This study improves our understanding of why investors make poor mutual fund choices and how price dispersion persists among homogeneous index funds. We also discuss insights for mutual fund regulation and academic literature on corporate disclosures.
In this research, I analyse how exposure to sin sectors impacts the financial performance of socially responsible (SR) funds. I also analyse the question of whether or not these funds keep their word and are less exposed to the controversial sectors that they claim to exclude in their prospectuses. Additionally, I analyse how local political and religious factors exert an influence on the exposure of SR funds to sin sectors. Consequently, I analyse a sample comprising 136 SR mutual funds that were domiciled in the U.S. market in the period March 2017–April 2020 and who invest in domestic and global equity, of which 92 implement negative screens on at least 1 of 12 controversial activities. My results show that for seven (three) of the controversial sectors that were analysed, the exposure of SR funds to these sectors jeopardises (improves) their financial performance. Furthermore, SR mutual funds who perform negative screens tend to live up to their name and are less exposed to the sector/s that they claim to exclude. In addition, SR mutual funds managed by companies located in Democrat‐leaning states are less exposed to sin sectors, and that the effect of local religiosity depends on the specific sector analysed.
The first chapter shows that mutual funds that hold illiquid stocks (“illiquid funds”) outperform funds that hold liquid stocks (“liquid funds”). There is evidence this outperformance arises from stock selection skills of illiquid funds. The stocks held by illiquid funds outperform portfolios matched by characteristics. Liquid funds declare benchmarks that make their benchmarkadjusted returns appear larger. A portfolio of stocks held by illiquid funds subsequently outperforms a portfolio of stocks held by liquid funds. The second chapter documents a predictability pattern in returns. This chapter identifies high opportunities in stocks with difficult valuation as times when returns of neglected stocks diverge from returns of covered stocks. Subsequent returns of stocks with difficult valuation are higher when beginning of period opportunities are high, as compared to when beginning of period opportunities are low. This is consistent with an information risk theory, where investors demand a higher premium to hold stocks with higher probability of informed trading, because they fear adverse selection. The third chapter explores instances when mutual funds change their style (style is regarded as risk exposure alongside usual factors). Mutual funds do not take more risk when it is more profitable to do so. After performing badly, mutual funds move closer to the style of good performing peer funds. Young funds' styles diverge from the style of old peer funds. Recently hired managers diverge in style from veteran managers of peer funds. When the average fund takes more risk alongside a style dimension, it does not simultaneously consider other style dimensions.
The timing abilities of fund managers are difficult to observe, therefore, identifying fund attributes explaining fund returns through timing abilities would be helpful to investors in selecting a particular fund. This study is an addition to the scarce literature covering the relationship of fund attributes on timing abilities of the mutual fund industry for an emerging economy, Pakistan, over the period 1999 to 2019. The study has employed a regression approach comprised of two stages. The findings of the study reveal that funds having more exposure to market movements show better market timing abilities and volatility timing abilities but poor selectivity timing abilities. Among all the variables, fund size has the largest impact on selectivity timing ability, depicting the efficiency of managers in selecting the right set of securities. Furthermore, the study concludes that the expense ratio and turnover ratio have a significant positive relationship with market timing abilities. However, the study reports a negative relationship between fund size and market timing ability. For volatility timing ability, the turnover ratio has the strongest effect, followed by market risk and turnover ratio respectively. For other fund attributes, the results report a weak relationship. These results provide valuable insight into the industry to focus more on the quality of the fund attributes resulting in improved timing abilities of fund managers.
p>Uzasadnienie teoretyczne: Alokacja kapitału na rynku akcji wiąże się z posiadaniem szerokiej wiedzy i umiejętności. Można tego dokonywać indywidualnie lub za pośrednictwem funduszy inwestycyjnych. Na rynkach funkcjonuje wiele funduszy, których strategie inwestycyjne nie różnią się od siebie, dlatego wybór spośród nich podmiotów do portfela inwestycyjnego nie jest łatwy. Na świecie, zwłaszcza na rynkach rozwiniętych, przeprowadzono wiele badań, które miały na celu zidentyfikowanie cech funduszy, które przynoszą ponadprzeciętne stopy zwrotu. W polskiej literaturze przedmiotu jednak brakuje analiz, które dotyczą relacji pomiędzy określonymi cechami funduszy a stopami zwrotu, jakie one osiągają. Niniejszy artykuł ma na celu wypełnienie tej luki.
Cel artykułu: Próba identyfikacji specyficznych cech charakteryzujących fundusze inwestycyjne, które wypracowywały najwyższe i najniższe stopy zwrotu na rynku. W opracowaniu poddano weryfikacji hipotezę zakładającą, że stopy zwrotu funduszy inwestycyjnych różnią się istotnie w zależności od cech charakterystycznych poszczególnych funduszy.
Metody badawcze: Na potrzeby artykułu przeanalizowano stopy zwrotu otwartych funduszy inwestycyjnych akcji typu uniwersalnego w podziale ze względu na wiek, wartość aktywów netto oraz poziom kosztów działalności funduszy. Zakres czasowy badania to lata 2009–2018. Do realizacji celu i weryfikacji hipotezy wykorzystano wnioskowanie dedukcyjne oraz metody statystyczne. Istotność różnic pomiędzy stopami zwrotu poszczególnych grup funduszy została przeanalizowana na podstawie testu t-Studenta.
Główne wnioski: Przeprowadzone analizy wykazały, że w okresie badań najwyższe stopy zwrotu uzyskały fundusze: 1) które działały na rynku od 10 do 15 lat (65,03% całkowitej stopy zwrotu); 2) których wartość aktywów mieściła się w przedziale od 50 do 100 mln zł (63,67%); 3) których koszty działalności w stosunku do aktywów mieściły się w przedziale od 3% do 4% (63,75%). Natomiast grupami funduszy, które uzyskały najniższe stopy zwrotu, były fundusze: 1) funkcjonujące na rynku od 5 do 10 lat (33,47%); 2) o wartości aktywów poniżej 10 mln zł (-21,79%); 3) których koszty działalności w stosunku do aktywów były powyżej 6% (16,69%). Podkreślić jednak należy, że różnice pomiędzy stopami zwrotu poszczególnych grup funduszy nie są statystycznie istotne. Z tego powodu postawiona hipoteza badawcza została zweryfikowana negatywnie.</p
It is recognized in the literature that there is a negative relationship between fund performance and fund exit. This paper analyses the performance of 6600 U.S. mutual funds that exited the market in the 2000–2014 period and nearly twice as many U.S. mutual funds that remained operational, to provide evidence on whether the negative exit – performance relationship existed during the 2008 financial crisis. We confirm the general relationship but show that, in contrast to all the other periods, there was no statistically significant exit – performance relationship during the financial crisis. We also show that the impact of expenses and loads on fund exit increased during the crisis. This is consistent with our argument that when some active investors leave the market, the passive ones become important to fund–families, albeit the investors may lose out as a result. We also show that the mergers that occurred in the years following the financial crisis resulted in statistically significantly worse post–merger performance of both the acquirers and of the targets in comparison with their pre–merger performance.
In this paper, I examine the flow and performance of mutual funds in Brazil and their portfolio allocations during the global financial crisis. First, I show that mutual funds exposed to deposits and securities issued by small banks suffered significant outflows, due to the increased risk aversion following Lehman’s default in 2008. The returns of funds exposed to small banks were also negatively affected. Funds adjusted their portfolios by reducing their exposures to deposits of small banks, but they increased risk taking when term deposit coverage limits were raised. The distress among small banks also generated negative spillover to the portfolio management business of banks, reducing their numbers of investors. The results illustrate the potential risks to financial stability, to the extent that interconnections among funds and banks can induce the transmission of shocks across markets.
This study investigates the manner in which consumers make investment decisions for mutual funds. Investors report that they consider many nonperformance related variables. When investors are grouped by similarity of investment decision process, a single small group appears to be highly knowledgeable about its investments. However, most investors appear to be naive, having little knowledge of the investment strategies or financial details of their investments. Implications for mutual fund companies are discussed.
The authors examine predictability for stock mutual funds using risk-adjusted returns. They find that past performance is predictive of future risk-adjusted performance. Applying modern portfolio theory techniques to past data improves selection and allows the authors to construct a portfolio of funds that significantly outperforms a rule based on past rank alone. In addition, they can form a combination of actively managed portfolios with the same risk as a portfolio of index funds but with higher mean return. The portfolios selected have small but statistically significant positive risk-adjusted returns during a period where mutual funds in general had negative risk-adjusted returns. Copyright 1996 by University of Chicago Press.
Recent studies (e.g. Gruber (1996)) conclude that a subset of investors allocates away from funds with relatively worse prospects, and toward funds with better prospects. The implication for a given fund is that good prospects increase the density of performance-sensitive investors, and bad prospects increase the density of performance-insensitive investors. Since fees come out of performance, this has a straightforward pricing implication: investors remaining in the funds with bad prospects should be charged more, whether by the same fund or by a different fund that absorbs the investors. This dynamic is apparent from several angles in a sample of retail money-funds.
One reason why funds charge different prices to their investors is that they face different demand curves. One source of differentiation
is asset retention: Performance-sensitive investors migrate from worse to better prospects, taking their performance sensitivity
with them. In the cross-section we show that past attrition significantly influences the current pricing of retail but not
institutional funds. In time-series we show that the repricing of retail funds after merging in new shareholders is predicted
by the estimated effect on its demand curve. This result is robust to other influences on repricing, including asset and account-size
changes.
Half of all of U.S. households own shares in one or more mutual funds, either directly or through personal or employer-sponsored retirement accounts. This article describes the structure and regulation of mutual funds and the resulting incentives facing those who make decisions for the funds. After providing some basic institutional details, it focuses on the cash flows from mutual fund investors to fund managers, brokers, and other third parties and the associated conflicts of interest. The article concludes with a summary of recent legal proceedings against mutual fund managers and brokers based on improper trading practices and regulatory proposals to curb those practices.
Abstract This paper examines responses from a survey of 2,000 randomly selected mutual fund investors who,purchased,shares from six different distribution channels. The survey provides data on the demographic, financial, and fund ownership characteristics of mutual fund investors. It also provides data on investors’ knowledge,of the costs and investment risks of mutual funds and the information sources these investors use to learn about these costs and risks. Our survey results strongly suggest there is room,for improvement,in the level of financial literacy of mutual fund investors. © 1999 Elsevier Science Inc. All rights reserved.
We apply a new bootstrap statistical technique to examine the performance of the U.S. open-end, domestic equity mutual fund industry over the 1975 to 2002 period. A bootstrap approach is necessary because the cross section of mutual fund alphas has a complex nonnormal distribution due to heterogeneous risk-taking by funds as well as nonnormalities in individual fund alpha distributions. Our bootstrap approach uncovers findings that differ from many past studies. Specifically, we find that a sizable minority of managers pick stocks well enough to more than cover their costs. Moreover, the superior alphas of these managers "persist." Copyright 2006 by The American Finance Association.
This paper develops a model to examine how mutual funds set fees charged to investors within a context of non–competitive market structure. The empirical evidence shows that the performance, age, size and cash ratio of the fund have statistically significant impacts on the mutual fund fees but, quantitatively, the majority of the fee is explained by mark–ups that funds add to the marginal cost owing to the market power possessed by the funds. Front–end load funds have the highest mark–ups, the back–end funds have the second highest, and no–load funds have the lowest mark–up.
This article develops and applies new measures of portfolio performance which use benchmarks based on the characteristics of stocks held by the portfolios that are evaluated. Specifically, the benchmarks are constructed from the returns of 125 passive portfolios that are matched with stocks held in the evaluated portfolio on the basis of the market capitalization, book‐to‐market, and prior‐year return characteristics of those stocks. Based on these benchmarks, “Characteristic Timing” and “Characteristic Selectivity” measures are developed that detect, respectively, whether portfolio managers successfully time their portfolio weightings on these characteristics and whether managers can select stocks that outperform the average stock having the same characteristics. We apply these measures to a new database of mutual fund holdings covering over 2500 equity funds from 1975 to 1994. Our results show that mutual funds, particularly aggressive‐growth funds, exhibit some selectivity ability, but that funds exhibit no characteristic timing ability.
The CRSP database is a fairly new publicly available database on mutual funds. It is comprehensive and is corrected for survivorship bias. It and the Morningstar database are likely to be the standard databases used by researchers in the future. Despite the care that has been exercised in compiling the CRSP database, it needs to be corrected for certain types of problems. The most obvious bias in the CRSP database is that it calculates fund returns for months with multiple distributions on the same day in a way that causes returns in those months to be overstated. This overstatement has an impact on overall returns and alphas which is of economic significance. The Morningstar database is free of this problem. We have shown that while CRSP does not suffer from survivorship bias, it does suffer from omission bias. Because only some small funds under $15 million in total net assets have monthly data on the CRSP database, and because the omitted funds have much greater merge and liquidation rates, we show that the returns reported for that group of funds which have monthly data overstate the population returns and alphas. We then examine the data CRSP provides on mergers. While these data are quite good in identifying mergers, we show that there are major problems in merger dates and reporting return data up to the time of the merger.
Survivorship induces a variety of biases in mutual fund research. I show analytically that biases in performance estimates depend on sample length and whether funds disappear after one or many poor returns. Using a sample free of survivor bias, I document higher risk and predominantly multiple-year underperformance in nonsurviving funds. This causes the bias in mean return estimates to increase in the time-length of the sample. In my data set, the bias is 0.43 percent per year in five-year samples and approximately one percent for samples longer than fifteen years. I also find downward bias in persistence tests and both upward and downward bias in the relations between performance and fund attributes depending on the type of selection bias. The results cast doubt on the conclusions of many published mutual fund studies.
We modify a method for identifying outliers in multivariate samples proposed by Hadi. A simulation study shows that this modification controls the size of the test, leads to substantially improved power and is more effective in dealing with the masking and swamping problems.
This paper develops a model to examine how mutual funds set fees charged to investors within a context of non-competitive market structure. The empirical evidence shows that the performance, age, size and cash ratio of the fund have statistically significant impacts on the mutual fund fees but quantitatively, the majority of the fee is explained by markups that funds add to the marginal cost due to the market power possessed by the funds. Front-end load funds have the highest markups, the back-end funds have the second highest markups and no-load funds have the lowest markup.
In June 2004, the Securities and Exchange Commission (SEC) adopted a new rule requiring enhanced disclosure regarding the approval of investment advisory contracts by the boards of directors of mutual funds. The SEC's interest in changing the disclosure rules regarding advisory contracts indicates there could be inefficiencies in the way funds choose and pay investment advisory firms. The goal of this paper is to study the funds' decisions regarding advisory fees and changes of advisors, and to understand their implications for fund peformance and inflows. This paper analyzes the dynamics of contractual agreements between mutual funds and investment advisors using a new dataset that covers U.S. funds between 1993-2002. I show that funds rarely experience contractual renegotiation and advisor changes. I also find cross-sectional and time-series determinants of advisory contracts. I show that fee-setting as well as firing decisions regarding the advisory firms are not only related to performance, but to other fund characteristics, such as differences in portfolio risk, ease of monitoring, economies of scale, restrictions on investors' actions, as well as differences between the bargaining power of the funds and their advisors. The sensitivity of the advisory fee to past performance is non-linear: for bottom- and mid-performers it is negative and significant, while for top performers it is positive and significant. Last, I show that advisory changes are beneficial: decreases in advisory rates significantly increase subsequent fund performance and net inflows. Separating from an advisor has a significant positive effect on the subsequent ranking of mid-performing funds. These results are puzzling: contractual changes are rare, in spite of their economically significant benefits.
In this paper, we examine a little known aspect of mutual fund accounting, whereby funds do not use contemporaneous fund holdings to calculate net asset values. This practice, sanctioned under SEC Rule 2a-4, uses stale portfolio holdings and gives rise to deviations between reported net asset values (NAVs) and returns and the economic values of those quantities. Using both simulations and a new sample of fund transaction data, we establish that distortions in both NAVs and returns are fairly common, and we discuss the implications of this observation for fund practice and regulation.
Retail investors often lack investment expertise. Mutual-fund brokers can help, but their incentives are mixed so it is an empirical question what value they add, both for consumers and for fund families. Investors pay more to invest through unaffiliated brokers than captive brokers, and while unaffiliated brokers add more value to redemptions, captive brokers add more value to inflows. No-load investors are less likely to sell their poor-performing funds and more likely to sell their winning funds, consistent with a disposition effect. Fund families benefit from a captive salesforce through recapture of redemptions, but also suffer through cannibalization of inflows.
In the 1990s, a large majority of funds with front-end loads introduced additional share classes, which allowed investors to pay annual fees and/or back-end charges instead of a front-end load. The transition to a multiple-class structure provides a natural experiment with regard to investor clienteles and fund performance. We examine (a) whether the new fee structures increase fund cash flows by attracting investors with different investment horizons and sensitivities to performance; (b) whether changes in the volatility and level of fund flows induced by new investor clienteles affect fund performance - despite little change in fund management and investment objectives. Our finding is that the multiple-class funds, after controlling for performance and fund attributes, attract significantly more new money than the single-class funds. Consistent with the clientele hypothesis, investors in the new classes tend to have a shorter investment horizon and a greater sensitivity to fund performance than investors in the front-end load class. The downside to introducing the new classes, however, is a significant drop in fund performance, which erodes the cash flow benefit of the new classes. Furthermore, the performance drop is shown to be increasing in the relative size of the new classes and in the volatility of their fund flows.
In this paper I derive a risk-adjusted measure of portfolio performance (now known as Jensen's Alpha) that estimates how much a manager's forecasting ability contributes to the fund's returns. The measure is based on the theory of the pricing of capital assets by Sharpe (1964), Lintner (1965a) and Treynor (Undated). I apply the measure to estimate the predictive ability of 115 mutual fund managers in the period 1945-1964 - that is their ability to earn returns which are higher than those we would expect given the level of risk of each of the portfolios. The foundations of the model and the properties of the performance measure suggested here are discussed in Section II. The evidence on mutual fund performance indicates not only that these 115 mutual funds were on average not able to predict security prices well enough to outperform a buy-the-market-and-hold policy, but also that there is very little evidence that any individual fund was able to do significantly better than that which we expected from mere random chance. It is also important to note that these conclusions hold even when we measure the fund returns gross of management expenses (that is assume their bookkeeping, research, and other expenses except brokerage commissions were obtained free). Thus on average the funds apparently were not quite successful enough in their trading activities to recoup even their brokerage expenses.
We examine a sample of 294 mutual funds that are advertised in Barron's or Money magazine. The preadvertisement performance of these funds is significantly higher than that of the benchmarks. We test whether the sponsors select funds to signal continued superior performance or they use the past superior performance to attract more money into the funds. Our analysis shows that there is no superior performance in the postadvertisement period. Thus, the results do not support the signaling hypothesis. On the other hand, we find that the advertised funds attract significantly more money in comparison with a group of control funds.
We study standard mutual fund performance measures, using simulated funds whose characteristics mimic actual funds. We find that performance measures used in previous mutual fund research have little ability to detect economically large magnitudes (e.g., three percent per year) of abnormal fund performance, particularly if a fund's style characteristics differ from those of the value-weighted market portfolio. Power can be substantially improved, however, using event-study procedures that analyze a fund's stock trades. These procedures are feasible using time-series data sets on mutual fund portfolio holdings.
In this article I explain why asset-based fees are common for mutual fund management companies and why the average fee has increased recently. I argue that Securities and Exchange Commission fee regulations make alternative fee types illegal or unattractive. Management companies can maintain higher fees because regulations and brand-name capital partly insulate them from competition and because investors cannot easily distinguish between performance-oriented and marketing-oriented fund companies. Index funds and unit investment trusts may offer competition to mutual funds in the future because they are designed to minimize management fees. 2003 The Southern Finance Association and the Southwestern Finance Association.
Mutual fund investors are subjected to many fees and expenses related to both the management of the fund assets and the sale and distribution of the fund's shares. In recent years these expenses have increased as a percentage of assets. The preoccupation of mutual fund investors with using performance evaluation as a selection criterion is misguided because of the volatility of investment returns. Whether the fund's performance is due to superior management or just good luck is difficult to determine. On the other hand, mutual fund expenses are stable. As such, the mutual fund investor should pursue a policy of choosing funds with low expenses. In this paper we conduct an empirical analysis of these expenses. The results of our analysis of equity funds suggest that expense-conscious investors should look at the fund size, age, turnover ratio, cash ratio, and existence of a 12b-1 fee as key determinants of expenses. Our analysis of bond funds suggests that the key factors are the fund's sales charge, weighted average maturity, size, and existence of a 12b-1 fee.
Since many mutual fund expenses are fixed costs, asset growth should reduce the ratio of fund expenses to average net assets. A translog cost function is estimated for a sample of 2,610 funds to evaluate the existence and extent of economies of scale in mutual fund administration. The elasticity of fund expenses with respect to fund assets is significantly less than one, indicating there are economies of scale in mutual fund administration. Average costs diminish over the full range of fund assets; however, the rapid decrease in average costs is exhausted by about $3.5 billion in fund assets.
This paper identifies five common risk factors in the returns on stocks and bonds. There are three stock-market factors: an overall market factor and factors related to firm size and book-to-market equity. There are two bond-market factors, related to maturity and default risks. Stock returns have shared variation due to the stock-market factors, and they are linked to bond returns through shared variation in the bond-market factors. Except for low-grade corporates, the bond-market factors capture the common variation in bond returns. Most important, the five factors seem to explain average returns on stocks and bonds.
This study uses a new database to describe the composition and compensation of boards of directors of U.S. open-end mutual funds. We use these data to examine the relation between board structure and the fees charged by a fund to its shareholders. We find that shareholder fees are lower when fund boards are smaller, have a greater fraction of independent directors, and are composed of directors who sit on a large fraction of the fund sponsor's other boards. We find some evidence that funds whose independent directors are paid relatively higher directors' fees approve higher shareholder fees.
In this paper, we develop a model of the market for equity mutual funds that captures three key characteristics of this market. First, there is competition among funds. Second, fund managers’ ability is not observed by investors before making their investment decisions. Third, some investors do not make optimal use of all available information. The main results of the paper are that (1) price competition is compatible with positive mark-ups in equilibrium, and (2) worse-performing funds set fees that are greater or equal to those set by better-performing funds. These predictions are supported by available empirical evidence.
This paper presents a parameter covariance matrix estimator which is consistent even when the disturbances of a linear regression model are heteroskedastic. This estimator does not depend on a formal model of the structure of the heteroskedasticity. By comparing the elements of the new estimator to those of the usual covariance estimator, one obtains a direct test for heteroskedasticity, since in the absence of heteroskedasticity, the two estimators will be approximately equal, but will generally diverge otherwise. The test has an appealing least squares interpretation.
http://deepblue.lib.umich.edu/bitstream/2027.42/35385/2/b2092633.0001.001.pdf http://deepblue.lib.umich.edu/bitstream/2027.42/35385/1/b2092633.0001.001.txt
We develop a simple rational model of active portfolio management that provides a natural benchmark against which to evaluate observed relationship between returns and fund flows. Many effects widely regarded as anomalous are consistent with this simple explanation. In the model, investments with active managers do not outperform passive benchmarks because of the competitive market for capital provision, combined with decreasing returns to scale in active portfolio management. Consequently, past performance cannot be used to predict future returns, or to infer the average skill level of active managers. The lack of persistence in actively managed returns does not imply that differential ability across managers is nonexistent or unrewarded, that gathering information about performance is socially wasteful, or that chasing performance is pointless. A strong relationship between past performance and the flow of funds exists in our model: indeed, this is the market mechanism that ensures that no predictability in performance exists. Choosing parameters to match the flow-performance relationship and survivorship rates, we find these features of the data are consistent with the vast majority (80%) of active managers having at least enough skill to make back their fees.
This paper examines a potential agency conflict between mutual fund investors and mutual fund companies. Investors would like the fund company to use its judgment to maximize risk-adjusted fund returns, the fund company has an incentive to increase the inflow of investments. The authors estimate the shape of the flow-performance relationship for a sample of growth and growth and income funds observed over the 1982-92 period. The shape creates incentives for fund managers to alter the riskiness of their portfolios. Examining portfolio holdings, the authors find that risk levels are changed toward the end of the year in a manner consistent with these incentives. Copyright 1997 by the University of Chicago.
We argue that the purchase decisions of mutual fund investors are influenced by salient, attention-grabbing information. Investors are more sensitive to salient, in-your-face fees, like front-end loads and commissions, than operating expenses; they buy funds that attract their attention through exceptional performance, marketing, or advertising. We analyze mutual fund flows over the last 30 years and find negative relations between flows and front-end-load fees. In contrast, we find no relation between operating expenses and flows. Additional analyses indicate that marketing and advertising, the costs of which are often embedded in funds' operating expenses, account for this surprising result.
Bayesian consumers infer that hidden add-on prices (e.g., the cost of ink for a printer) are likely to be high prices. If consumers are Bayesian, firms will not shroud information in equilibrium. However, shrouding may occur in an economy with some myopic (or unaware) consumers. Such shrouding creates an inefficiency, which firms may have an incentive to eliminate by educating their competitors' customers. However, if add-ons have close substitutes, a "curse of debiasing" arises, and firms will not be able to profitably debias consumers by unshrouding add-ons. In equilibrium, two kinds of exploitation coexist. Optimizing firms exploit myopic consumers through marketing schemes that shroud high-priced add-ons. In turn, sophisticated consumers exploit these marketing schemes. It is not possible to profitably drive away the business of sophisticates. It is also not possible to profitably lure either myopes or sophisticates to nonexploitative firms. We show that informational shrouding flourishes even in highly competitive markets, even in markets with costless advertising, and even when the shrouding generates allocational inefficiencies. Copyright (c) 2006 by the President and Fellows of Harvard College and the Massachusetts Institute of Technology..
In corporate finance and asset pricing empirical work, researchers are often confronted with panel data. In these data sets, the residuals may be correlated across firms or across time, and OLS standard errors can be biased. Historically, researchers in the two literatures have used different solutions to this problem. This paper examines the different methods used in the literature and explains when the different methods yield the same (and correct) standard errors and when they diverge. The intent is to provide intuition as to why the different approaches sometimes give different answers and give researchers guidance for their use. The Author 2008. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please email: journals.permissions@oxfordjournals.org, Oxford University Press.
There are many instances where financial claims trade at prices set by intermediaries. Pricing by an intermediary introduces the potential for economic distortions from innumerable sources. As one example, we show that nonsynchronous-trading generates predictable, readily exploitable, changes in mutual fund-share prices (NAV). The exploitation of predictable changes in mutual fund NAVs involved a wealth transfer from buy-and-hold fund investors to active fund traders and is costly to all fund investors. A simple modification to the mutual fund pricing algorithm eliminates much of this predictability, but nonsynchronous trading is just one of the issues intermediaries face when setting prices.
This article provides a comprehensive study of survivorship issues using the mutual fund data of Carhart (1997). We demonstrate theoretically that when survival depends on multiperiod performance, the survivorship bias in average performance typically increases with the sample length. This is empirically relevant because evidence suggests a multiyear survival rule for U.S. mutual funds. In the data we find the annual bias increases from 0.07% for 1-year samples to 1% for samples longer than 15 years. We find that survivor conditioning weakens evidence of performance persistence. Finally, we explain how survivor conditioning affects the relation between performance and fund characteristics. Copyright 2002, Oxford University Press.
This paper examines a potential agency conflict between mutual fund investors and mutual fund companies. Investors would like the fund company to use its judgment to maximize risk-adjusted fund returns. A fund company, however, in its desire to maximize its value as a concern, has an incentive to take actions that increase the inflow of investments. We use a semiparametric model to estimate the shape of the flow-performance relationship for a sample of growth and growth and income funds observed over the 1982-92 period. The shape of the flow-performance relationship creates incentives for fund managers to increase or decrease the riskiness of the fund that are dependent on the fund's year-to-date return. We examine portfolio holdings of mutual funds in September and December and show that mutual funds do alter the riskiness of their portfolios at the end of the year in a manner consistent with these incentives.
We investigate whether mutual fund families strategically transfer performance across member funds to favor those more likely to increase overall family profits. We find that "high family value" funds (i.e., high fees or high past performers) overperform at the expense of "low value" funds. Such a performance gap is above the one existing between similar funds not affiliated with the same family. Better allocations of underpriced initial public offering deals and opposite trades across member funds partly explain why high value funds overperform. Our findings highlight how the family organization prevalent in the mutual fund industry generates distortions in delegated asset management. Copyright 2006 by The American Finance Association.
We develop a performance evaluation approach in which a fund manager's skill is judged by the extent to which the manager's investment decisions resemble the decisions of managers with distinguished performance records. The proposed performance measures use historical returns and holdings of many funds to evaluate the performance of a single fund. Simulations demonstrate that our measures are particularly useful in ranking managers. In an application that relies on such ranking, our measures reveal strong predictability in the returns of U.S. equity funds. Our measures provide information about future fund returns that is not contained in the standard measures. Copyright 2005 by The American Finance Association.
This paper examines the effect of incentive fees on the behavior of mutual fund managers. Funds with incentive fees exhibit positive stock selection ability, but a beta less than one results in funds not earning positive fees. From an investor's perspective, positive alphas plus lower expense ratios make incentive-fee funds attractive. However, incentive-fee funds take on more risk than non-incentive-fee funds, and they increase risk after a period of poor performance. Incentive fees are useful marketing tools, since more new cash flows go into incentive-fee funds than into non-incentive-fee funds, ceteris paribus. Copyright (c) 2003 by the American Finance Association.
We investigate marginal compensation rates in mutual fund advisory contracts and find the following. Equity and foreign fund advisors receive higher marginal compensation than debt and domestic fund advisors. Advisors of funds with greater turnover receive higher marginal compensation. Also, closed-end fund advisors receive higher marginal compensation than open-end fund advisors. Finally, we find that marginal compensation is lower for advisors of large funds and members of large fund families. We argue that these differences in marginal compensation reflect differences in advisor marginal product, differences in the difficulty of monitoring performance, differences in control environments, and scale economies. Copyright The American Finance Association 2002.
We examine whether mutual fund performance is related to characteristics of fund managers that may indicate ability, knowledge, or effort. In particular, we study the relationship between performance and the manager's age, the average composite SAT score at the manager's undergraduate institution, and whether the manager has an MBA. Although the raw data suggest striking return differences between managers with different characteristics, most of these can be explained by behavioral differences between managers and by selection biases. After adjusting for these, some performance differences remain. In particular, managers who attended higher-SAT undergraduate institutions have systematically higher risk-adjusted excess returns. Copyright The American Finance Association 1999.
This paper studies the flows of funds into and out of equity mutual funds. Consumers base their fund purchase decisions on prior performance information, but do so asymmetrically, investing disproportionately more in funds that performed very well the prior period. Search costs seem to be an important determinant of fund flows. High performance appears to be most salient for funds that exert higher marketing effort, as measured by higher fees. Flows are directly related to the size of the fund's complex as well as the current media attention received by the fund, which lower consumers' search costs. Copyright The American Finance Association 1998.
Several recent studies suggest that equity mutual fund managers achieve superior returns and that considerable persistence in performance exists. This study utilizes a unique data set including returns from all equity mutual funds existing each year. These data enables the author to more precisely examine performance and the extent of survivorship bias. In the aggregate, funds have underperformed benchmark portfolios both after management expenses and even gross of expenses. Survivorship bias appears to be more important than other studies have estimated. Moreover, while considerable performance persistence existed during the 1970s, there was no consistency in fund returns during the 1980s. Copyright 1995 by American Finance Association.
The relative performance of no-load, growth-oriented mutual funds persists in the near term, with the strongest evidence for a one-year evaluation horizon. Portfolios of recent poor performers do significantly worse than standard benchmarks; those of recent top performers do better, though not significantly so. The difference in risk-adjusted performance between the top and bottom octile portfoli os is six to eight percent per year. These results are not attributable to known anomalies or survivorship bias. Investigations with a differen t (previously used) data set and with some post-1988 data confirm the finding of persistence. Copyright 1993 by American Finance Association.
We investigate the effect of scale on performance in the active money management industry. We first document that fund returns, both before and after fees and expenses, decline with lagged fund size, even after accounting for various performance benchmarks. We then explore a number of potential explanations for this relationship. This association is most pronounced among funds that have to invest in small and illiquid stocks, suggesting that these adverse scale effects are related to liquidity. Controlling for its size, a fund's return does not deteriorate with the size of the family that it belongs to, indicating that scale need not be bad for performance depending on how the fund is organized. Finally, using data on whether funds are solo-managed or team-managed and the composition of fund investments, we explore the idea that scale erodes fund performance because of the interaction of liquidity and organizational diseconomies.
Examines the arbitrage model of capital asset pricing as an alternative to the mean variance capital asset pricing model introduced by Sharpe, Lintner and Treynor. Overview of the arbitrage theory; Role of the arbitrage model in explaining phenomena observed in capital markets for risky assets; Influence of the presence of noise on the pricing relation. (Из Ebsco)
The literature documents a convex relation between past returns and fund flows of mutual funds. We show this to be consistent with fund incentives, because funds discard exactly those strategies which underperform. Past returns tell less about the future performance of funds which discard, so flows are less sensitive to them when they are poor. Our model predicts that strategy changes only occur after bad performance, and that bad performers who change strategy have dollar flow and future performance that are less sensitive to current performance than those that do not. Empirical tests support both predictions. Copyright (c) 2003 by the American Finance Association.