On the characteristics and performance of long-short, market-neutral and bear mutual funds

We evaluate the return performance of long-short, market-neutral and bear mutual funds using multi-factor models and a conditional CAPM that allows for time-varying risk. Differences in the bearish posture of these mutual funds result in different performance characteristics. Returns to long-short mutual funds vary with the market, returns to market-neutral mutual funds are uncorrelated with the market and returns to bear mutual funds are negatively correlated. Using the conditional CAPM we document significant changes in the market-risk exposure of the most bearish of these funds during different economic climates. We then assess the flow-performance relationship for up to 60 months following up and down markets and find that investors direct flows towards market-neutral and bearish funds for several months after down markets. Market-neutral funds provide a down market hedge, but bear funds do not generate the returns that investors hope for.     

Fund flows and performance: New evidence from retail and institutional SRI mutual funds

In this paper we provide a comprehensive analysis of the performance of US SRI mutual funds as well as its relation to the flow of new money that those funds experience in the context of investors sophistication. In particular, we compare the performance of SRI funds with their conventional peers, matched by both managers and characteristics criteria, using several performance measures. We investigate the role of investors sophistication and its influence on the flow-performance and performance-flow relations within the retail and institutional SRI fund shareclasses. For the analysis of the flow-performance relation we use portfolio approach along with monotonic relation test, while the shape of the flow-performance relation is studied using piecewise linear panel regressions. For the performance-flow relation, the flow and unexpected flow portfolios are formed and their risk-adjusted performance is evaluated. We find that SRI mutual fund sector earns positive abnormal returns before expenses and retail SRI funds outperform their institutional peers both, before and after fees. No differences in performance when we consider SRI and conventional funds run by the same management companies. Moreover, we find a positive flow-performance relation which is convex for retail SRI funds but no convexity is found for the institutional ones. We cannot confirm the smart money effect for retail SRI funds, instead we find a dumb money effect for SRI institutional funds. Our paper provides new insights into the role of the investors sophistication for those relations in the presence of sustainability preferences.     

Flow-Performance Relationship and Star Effect: New Evidence from Chinese Mutual Funds

In this paper, we reexamine the mutual fund flow-performance relationship and star effect using mutual funds in China that have unique features of high risk and low performance persistence. Confirming prior studies, we find that fund performance is positively related to flows in subsequent periods. However, our results show that funds that performed well in the past do not attract additional inflows after controlling for performance. In addition, a star fund, a fund with a five-star Morningstar rating, does not have any significant effect on the fund's flows. These results suggest that it is important to recognize the difference in investor groups and factors that affect performance persistence when analyzing the mutual fund flow-performance relationship.     

Mutual fund risk and market share-adjusted fund flows

Several papers use a fractional specification (net inflow/ assets under management) to infer a convex relation between flow and past performance. However, heterogeneous linear response functions combined with the pooled analysis commonly used in these studies can yield false convexity estimates. We show that such heterogeneity obtains in practice. Along these same lines, the paper also finds that several previously unexamined implications of a convex flow-performance relation fail to hold. Moreover, convexity with fractional flows (which we confirm) largely disappears in a conditional analysis that controls for heterogeneity. Market shares offer an alternative specification for flow that is more resilient to heterogeneity. Using this alternative specification, we again find no evidence of convexity in the flow-performance relation. We conclude that the widely held belief that the flow response function is convex is due solely to misspecification of the empirical model. The flow-return relation is linear.     

Measuring Innovation and Product Differentiation: Evidence from Mutual Funds

We study innovation and product differentiation using a uniqueness measure based on textual analysis of prospectuses. We find that small and start-up families have higher start rates than larger families, and their products are more unique. Unique strategies attract more inflows in the first three years, and investors respond more to text-based uniqueness than other measures such as holdings or returns uniqueness. For established funds, word uniqueness has weak negative power for explaining returns, so investors in competitive equilibrium do not sacrifice much performance to get specialized products. Uniqueness attenuates the flow-performance relation, reducing the risk of investor outflows.     

Venture capital funds: Flow-performance relationship and performance persistence

This paper finds that venture capital funds that are expected to be backed by more skilled investors show no performance persistence but a significant flow-performance relationship. In contrast, funds that are expected to be backed by less skilled investors show performance predictability and have a non-significant flow-performance relationship. These results suggest that only skilled investors use all available information to adjust their capital allocation and, as a result, eliminate performance predictability as argued theoretically by Berk and Green (2004). Results also show that Kaplan and Schoar (2005) overstate the persistence in fund performance by not using an ex ante measure of the performance of earlier funds. Whether or not an ex ante measure is used, however, the persistence is largely due to unsophisticated investors. When investors are sophisticated, the performance of earlier funds, sequence and fund size do not help predict the performance of the focal fund.     

Real Estate Fund Flows and the Flow-Performance Relationship

Convexity in the flow-performance relationship of traditional asset class mutual funds is widely documented, however it cannot be assumed to hold for alternative asset classes. This paper addresses this shortcoming in the literature by examining the flow-performance relationship for real estate funds, specifically open-end, direct-property funds. This investment vehicle is designed to provide the risk-return benefits of private market real estate and is available to retail investors in many countries across the globe. An understanding of fund flow dynamics associated with this investment vehicle is of particular interest due to the liquidity risk associated with holding an inherently illiquid asset in an open-end structure. Our analysis draws on the theoretical foundations provided in the literature on mutual fund flows, performance chasing, liquidity risk, participation costs and dynamics across market cycles. We focus on German real estate funds from 1990 to 2010 as this is the largest market globally and there is a high level of confidence in the data. The results show that real estate fund investors chase past performance at the aggregate level and the relationship between flows and relative performance is asymmetric (i.e., convex) at the individual fund level. Fund-level liquidity risk tends to weaken convexity, while sensitivity increases with higher participation costs. We find the flow-performance relationship varies across time, though our interpretation is asset and investment vehicle specific. The implications are applicable to investors and fund managers of open-end, direct-property funds and, more broadly, other alternative asset funds where the underlying asset may not be liquid.     

Liquidity management,operating performance,and corporate value: evidence from Japan and Taiwan

This study examines the relationship between liquidity management and operating performance, and that between liquidity management and corporate value for firms in Japan and Taiwan. We observe that the cash conversion cycle (CCC)–returns on assets (ROA) and CCC–returns on equity (ROE) relationships are commonly negative and sensitive to industry factors. Both Japanese and Taiwanese firms with q>1 have significantly lower CCC than firms with q⩽1. In addition, Japanese firms with q>1 have significantly higher ROA and ROE than firms with q⩽1. Overall, the findings indicate that aggressive liquidity management enhances operating performance and is usually associated with higher corporate values for both countries in spite of differences in structural characteristics or in financial system of a firm.     

Improving the Health of Healthcare Companies

The healthcare sector has been extremely effective in improving human health while at the same time delivering outstanding returns to shareholders, at least on average. But averages can hide a lot of poor performance, and careful examination of the sector shows a sizable disparity between the long‐run productivity and value added of the top companies and the rest. To better understand the reasons for this disparity, the authors undertook a comprehensive study of how differences in capital deployment strategies, financial policies, and measures of corporate operating performance such as sales growth and return on capital are associated with returns to shareholders. Perhaps the most striking finding is the strong positive correlation in the healthcare industry between higher rates of reinvestment, especially in the form of spending on R&D and acquisitions, and stock price performance. And given the importance of such reinvestment, it is not surprising that maintaining financial flexibility by paying down net debt and otherwise limiting corporate leverage—and even issuing significant equity—are all associated with higher stock returns. When it comes to operating performance, moreover, it's not enough just to be good; it takes growth and improvement in cash flow and earnings to drive share prices higher. Measures of changes in performance such as increases in EBIT and ROIC, and high rates of growth in sales, all show consistently strong and positive relationships with stock returns while measures of levels of performance, especially EBIT margins and EBITDA margins, demonstrate relationships that are weak and in some cases even negative. Last, and consistent with the findings reported above, despite often vocal investor demands to pay dividends and buy back shares, in the case of healthcare as a whole such distributions have a clearly inverse relationship with share price performance. That is to say, the larger the payouts to shareholders, the lower the shareholder returns.     

Informed Futures Trading and Price Discovery: Evidence from Taiwan Futures and Stock Markets

This article focuses on the information effects between the futures market and its spot market. Intraday data are used to investigate the lead-lag relationships between the returns and trading activity of Taiwan stock index futures and the spot returns. We focus on the transmission direction and the sources of information. Consistent with most previous studies, our results show that other than the contemporaneous relationship predicted by carry-cost theory and efficient market theory, futures returns significantly lead spot returns, which implies that informed trades may occur in the futures market. Using private transaction information, net open buy, as a proxy for futures trading activity and distinguishing different types of futures traders, we find that foreign institutional traders are the major source of informed trades because their trading has predictive power for future movements in both spot and futures prices. Traders in other categories are information laggards.     

Does q-theory with investment frictions explain anomalies in the cross section of returns?

Q-theory predicts that investment frictions steepen the relation between expected returns and firm investment. Using financing constraints to proxy for investment frictions, we show only weak evidence that the investment-to-assets and asset growth effects in the cross section of returns are stronger in financially more constrained firms than in financially less constrained firms. There is no evidence that q-theory with investment frictions explains the investment growth, net stock issues, abnormal corporate investment, or net operating assets anomalies. Limits-to-arbitrage proxies dominate q-theory with investment frictions in explaining the magnitude of the investment-to-assets and asset growth anomalies in direct comparisons.     

Investor monitoring and differences in mutual fund performance

A number of mutual funds cater exclusively to institutional investors. Although institutional funds might be a natural place to look for “smart money”, agency costs associated with delegated monitoring may lead to less monitoring and worse overall performance. We split institutional funds based on proxies for the degree of investor oversight, and we find that institutional funds with low initial investment requirements and funds with retail mates perform significantly worse than other institutional funds both before and after adjusting for risk and expenses. Tracking error is especially important in the flow-performance relationship of institutional funds with high minimum investment requirements.     

The effect of investor service costs on mutual fund performance

We examine the effect of investor service costs on mutual fund performance. Benchmarking passive funds against ETFs managed by the same fund company with the same investment objectives, we show that passive funds on average underperform ETFs by 42 bps in annualized net returns, of which about 90% can be attributed to investor service costs. Further benchmarking active funds against passive funds, we show that active funds on average outperform passive funds by 31 bps in annualized gross returns. However, the higher expense ratios charged by active funds lead to about 28 bps of underperformance in annualized net fund returns.     

Do corporate boards matter during the current financial crisis?

This study examines the impact of corporate boards on firm performance during the current financial crisis. Using buy-and-hold abnormal returns over the crisis to measure firm performance, we find that board independence, as traditionally defined, does not significantly affect firm performance. However, when we redefine independent directors as outside directors who are less connected with current CEOs, a measure we call strong independence, there is a positive and significant relationship between this measure and firm performance. Second, outside financial experts are important for firm performance. We find that the positive impact of outside financial experts on firm performance is more significant than that of strong independence. Overall, our results suggest that firm performance during a crisis is a function of firm-level differences in corporate boards.     

Purchase and redemption decisions of mutual fund investors and the role of fund families

This paper investigates the purchases and redemptions of a large cross-sectional sample of German equity funds. We find that investors not only punish bad performance by selling their shares, but also have a tendency to sell winners. Investors in large fund families show higher sales and redemption rates. Furthermore, family size also affects the flow-performance relationship: investors in large families punish bad performance more. Last, we find that inner family rankings play an important part for redemptions, with investors strongly redeeming their shares from intra-family losers. This result provides a potential reconciliation to the apparent contradiction between the low average holding period of mutual fund investors and the lack of investor discipline.     

Mutual fund performance persistence: Factor models and portfolio size

We re-examine US mutual fund performance persistence. We investigate persistence (i) using both “academic” factor models and “practitioner” index models, (ii) using decile-size recursive portfolios and also portfolios formed from smaller numbers of funds, (iii) using nonparametric bootstrap p-values as well as conventional t-tests and (iv) using both net-of-fee fund returns (net alphas) and gross alphas. Our key result is that positive net alpha performance persistence can be found using small portfolios of funds together with a holding period of 6 months or less, for both practitioner index models and academic factor models.     

Net share issues and the cross‐section of equity returns under a dividend imputation tax system

Despite considerable empirical evidence reporting a negative relationship between net share issuance and subsequent returns, it remains unresolved whether this anomaly is explained by risk or investor irrationality. This study examines the net share issuance anomaly using seasoned equity offerings before and after the introduction of an imputation tax system. We report robust evidence of a negative relationship between net share issuance and returns post‐imputation, but no relationship pre‐imputation. Our results provide evidence to support the international pervasiveness of the net share issuance anomaly, but more importantly suggest that this anomaly may be explained by risk.     

Are idiosyncratic volatility and MAX priced in the Canadian market?

The negative relationship between realized idiosyncratic volatility (RIvol) and future returns uncovered by Ang et al. (2006) for the U.S. market has been attributed to return reversals. For the Canadian market where return reversals are considerably less important, we find that RIvol is positively related to future returns, even after controlling for risk loadings, illiquidity and reversals. Unlike the findings of Bali et al. (2001) for the U.S. market, we find that the relationship between extreme positive returns (MAX) and future returns for the Canadian market is positive and that idiosyncratic volatility continues to be consistently positively related to future returns after controlling for MAX. We find evidence that suggests that reversals for stocks with extreme daily returns are confined to (typically small) stocks with low institutional holdings.     

Personal taxes and the time variation of stock returns – evidence from the UK

A potential explanation for the time-series predictability of market returns with dividend yields is the differential tax treatment of capital gains and dividends. This article investigates to what extent the predictability of long-horizon returns can be explained by this tax effect. Assuming that after-tax expected returns are constant, we test the derived relationships between pretax returns and lagged dividend yields with UK data. We also compare the predictability of before-tax long-horizon returns with that of after-tax returns. The results indicate that the tax treatment of dividends does not significantly contribute towards the predictability of stock returns.     

Value Relevance of Comprehensive Income for the Canadian Market*

The value relevance of comprehensive income (CI) compared to net income (NI) remains unresolved. We look at this issue in the Canadian market, using association methods to determine the value relevance of reporting CI and other comprehensive income (OCI) components for stock prices and returns. The sample consists of all the firms in the S&P/TSX Composite Index that prepared their financial statements according to Canadian standards or International Financial Reporting Standards (IFRS) over the 2008–2016 period. Although we find no evidence that CI is more value relevant than NI for stock prices and returns, we note that some OCI components are incrementally value relevant beyond NI for both amounts. In addition, financial services firms differ from other companies in terms of the relationships between some of their OCI components and prices or returns, with such firms even driving some relationships. Relationships between OCI components and prices or returns are also affected when data from the financial crisis period are excluded, with some relationships even changing after IFRS adoption. These results inform Canadian standard setters and financial statement users that OCI components are decision useful for the Canadian market.