Does Stock Return Momentum Explain the “Smart Money” Effect?

Does the “smart money” effect documented by Gruber (1996) and Zheng (1999) reflect fund selection ability of mutual fund investors? We examine the finding that investors are able to predict mutual fund performance and invest accordingly. We show that the smart money effect is explained by the stock return momentum phenomenon documented by Jegadeesh and Titman (1993) . Further evidence suggests investors do not select funds based on a momentum investing style, but rather simply chase funds that were recent winners. Our finding that a common factor in stock returns explains the smart money effect offers no affirmation of investor fund selection ability.     

The Mismatch Between Mutual Fund Scale and Skill

I demonstrate that skill and scale are mismatched among actively managed equity mutual funds. Many mutual fund investors confuse the effects of fund exposures to common systematic factors with managerial skill when allocating capital among funds. Active mutual funds with positive factor-related past returns thus accumulate assets to the point that they significantly underperform. I also show that the negative aggregate benchmark-adjusted performance of active equity mutual funds is driven mainly by these oversized funds.     

Taxes and the growth in mutual funds: Evidence from OBRA 93

In recent years, individuals have steadily moved from direct ownership of equities to holding securities through mutual funds. Prior research has attributed this phenomenon to tax incentives to hold mutual funds in tax-preferred retirement accounts. In contrast, employing household-level microdata and using OBRA 93 as a quasi-natural experimental setting, we find that on average, investors reduced their mutual fund holdings within tax-preferred accounts following a tax rate increase. However, we also observe that this effect is primarily driven by investors with relatively high trading activity within their tax-preferred accounts; investors exhibiting relatively low trading activity generally increased their mutual fund investments in these accounts after OBRA 93. Investors who increased their mutual fund holdings did not do so by rebalancing away from other asset classes. Collectively, our results suggest that taxes are not driving the growth in mutual funds. This finding has important public policy implications because of the growing popularity of using mutual funds as a retirement savings vehicle, the dwindling number of individuals covered by defined benefit plans, the dramatic increase in the importance of mutual funds as a financial intermediary, and the continued state of flux in U.S. tax policy.     

THE PERFORMANCE OF BANK‐MANAGED MUTUAL FUNDS

The ability of banks to offer proprietary mutual funds has expanded over recent years, and the mutual fund industry has been a significant growth area for banks. I examine the growth and performance of bank proprietary bond mutual funds. The empirical results show no evidence that bank‐managed mutual funds underperform nonbank funds. I find some evidence that bank managers are more conservative than nonbank managers in terms of investment strategy and that banks appear more likely to target individual rather than institutional investors. Also, I find that abnormal fund performance does not appear to be a significant determinant of the net asset flows into and out of bank‐managed mutual funds. Rather, the results suggest bank investors rely mainly on past marketing information and the general reputation of the bank. JEL classification: G11, G21     

International Real Estate Mutual Fund Performance: Diversification or Costly Information?

We investigate the net effect between diversification benefit and information cost of international real estate mutual funds from three dimensions: whether investors can benefit from investing in international real estate mutual funds, whether managers of international real estate mutual funds possess superior market knowledge and timing abilities, and whether investors are motivated by returns or diversification. Our findings are threefold. First, the results show that international real estate mutual funds perform better and are less risky than domestic real estate mutual funds before Jun 2007. That is, diversification benefits outweigh the information costs, and investors therefore gain from investing in international real estate mutual funds. However, the benefit is reduced because of the economic shock of sub-prime financial crisis. Second, on average, neither international mutual fund managers nor domestic mutual fund managers possess market timing abilities. Finally, we find that fund flows are driven by investors’ return-chasing behaviors and fund size, but not by diversification purpose.     

中国公募基金挖掘了股票市场异象吗？

公募基金是我国重要的机构投资者之一,分析其投资逻辑对理解机构投资者行为和公募基金的选择至关重要。基于2005年至2019年主动管理偏股型开放式基金数据,本文检验了公募基金对A股市场87个异象因子的挖掘。为解决因子维度过大问题,本文采用非参方法从87个异象因子中提取有效信息的综合指标A-Score,并根据基金持仓构建基金的异象投资指标AIM(Anomalies Investing Measure)。结果显示:(1)中国公募基金挖掘了市场异象;(2)利用AIM可以选择表现更好的基金,并能获得0.45%的月度多空组合收益;(3)基金经理的选股能力、风格选择能力和风控能力是其挖掘异象收益的主要来源;(4)异象挖掘可以为基金带来长期资金流,同时也缓和了市场的错误定价。     

Dividend or growth funds: What drives individual investors' choices?

We study dividend fund buying behavior using over 80,000 individual Chinese mutual fund investors from a private Chinese mutual fund account dataset. Based on a variety of specifications and logistic regressions, we empirically investigate investors' characteristics in choosing dividend-paying and/or growth mutual funds under different market scenarios. To the best of our knowledge, this research represents an initial attempt to study individual dividend investors in mutual fund markets. We find that older Chinese investors prefer dividend-paying funds less than growth funds, but this depends on different market conditions, and the age effect shows a nonlinear mode when considering age grouping. Moreover, investors' prior experience plays a crucial role in choosing the fund type; however, the conclusions vary with market scenarios. In addition, female investors prefer more dividend-paying funds than do male investors, but investing experience counteracts this difference. We also find that geographic location is a contributor when investors decide the fund type.     

Mutual fund flows and investor returns: An empirical examination of fund investor timing ability

We examine the timing ability of mutual fund investors using cash flow data at the individual fund level. Over 1991–2004 equity fund investor timing decisions reduce fund investor average returns by 1.56% annually. Underperformance due to poor timing is greater in load funds and funds with relatively large risk-adjusted returns. In particular, the magnitude of investor underperformance due to poor timing largely offsets the risk-adjusted alpha gains offered by good-performing funds. Investors in both actively managed funds and index funds exhibit poor investment timing. We demonstrate that our empirical results are consistent with investor return-chasing behavior.     

Mutual fund advertising: Should investors take notice?

This research investigates the relationship between advertising, quality, and price in the mutual fund market, considering both equity and fixed income funds. The research considers these relationships based on the results for a time period following the advertisement. Given the complexity of the mutual fund purchase decision for investors, this research provides an initial investigation into whether investors can infer mutual fund quality and price from the presence of mutual fund advertising. Post-advertising period results show a negative relationship between advertising and fund quality, indicating that previously advertised funds exhibit weaker performance than nonadvertised funds. During the post-advertisement period, both equity and fixed income funds exhibit lower expenses (ie, price) than nonadvertised funds. These research findings and implications for theory are discussed.     

Mutual Fund Tax Clienteles

Mutual funds are held by investors in taxable and tax‐qualified retirement accounts. We investigate whether the characteristics, investment strategies, and performance of mutual funds held by these diverse tax clienteles differ. Examining both mutual fund distributions and mutual fund holdings, we find that funds held primarily by taxable investors choose investment strategies that result in lower tax burdens than funds held primarily in tax‐qualified accounts. Despite these differences, we find no evidence that any investment constraints that may arise from these tax‐efficient investment strategies result in performance differences between funds held by different tax clienteles.     

Regulation And The Rise In Asset-Based Mutual Fund Management Fees

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.     

Financial consequences of mutual fund mergers

This study examines the impact of mutual fund mergers on performance and investment flows of target and acquiring funds. Results indicate some improvements in the post-merger performance for target funds shareholders. Results also confirm prior evidence of negative net asset flows in target funds in the pre-merger period as well as negative, but not significant, net asset flows in the years following the merger. However, a more detailed analysis allows us to observe that this lack of significance in the negative reaction of investors to mutual fund mergers is explained by the compensation of abnormally high inflows and outflows in the resultant funds. These substantial flows are significantly above the average in their market segment, especially regarding money flows. This finding provides evidence that investors pay attention to mutual fund mergers, especially institutional investors who are concentrated on the market possibilities resulting from these organizational processes.     

The impact of the Arab Spring and the Ebola outbreak on African equity mutual fund investor decisions

Financial development and stock markets have been widely considered to be key factors in economic growth. Among institutional investors, mutual funds play a key role in providing financial resources to stock markets, particularly in developing countries. Different from other investments, mutual fund flows could be affected by retail investors’ behavior and their overreaction to specific events. We considered 78 equity mutual funds that are geographically specialized in African countries and observed monthly flows and performance for the period of 2006–2015. We find that two major events, Ebola and the Arab Spring, significantly affected the fund flows, controlling for fund performance, expenses and market returns. Retail investors over-reacted to these major events, withdrawing their savings from the African mutual funds. This result is particularly strong when connected to the media coverage of these events: the higher the number of articles about Arab Spring and Ebola, the higher the withdrawals. These irrational investors’ behavior damaged the funds’ managers market timing ability, and reduced the equity capital injection into African stock markets. Our results have several implications for both holders of frontier market mutual funds and the overall asset management industry.     

THE COST OF MUTUAL FUND DISTRIBUTION FEES

Many individuals purchase shares in mutual funds as investments. With a lack of evidence supporting performance persistence in fund returns, investors should consider expenses as a fund-selection tool since fund expenses have a negative effect on fund returns. One of the largest expenses incurred by fund investors is distribution expenses, which include both load charges and annual fees. Close to two-thirds of all equity funds charge investors for fund distribution. The true cost of these distribution fees to investors is hard to measure because a myriad of distribution arrangements have evolved that vary both the timing and magnitude of distribution charges. We derive a simple methodology that expresses the present value of distribution costs as a percentage of the original investment in fund shares for any expected holding period. This methodology allows direct comparison of the effect on investors of distribution fees for mutual funds with different types of sales arrangements.     

Selling winners, holding losers: Effect on fund flows and survival of disposition-prone mutual funds

Recent studies suggest that presence of a disposition effect in a large subset of investors can create stock mispricings, which has serious implications for market efficiency. We examine whether US equity mutual funds are disposition-prone, how that effect influences performance, investor flows and fund survival, and whether the disposition orientation of mutual funds affects stock prices in a sustained manner.We find that about 30% of all funds exhibit some degree of disposition behavior and that such funds underperform funds that are not disposition-prone by 4-6% per year. Moreover, after controlling for performance, tax overhang and other factors that potentially affect flows, disposition-prone funds attract significantly smaller flows than other funds. The results suggest that mutual fund investors are smart enough to minimize investment in disposition-prone funds. Consequently, disposition-prone funds have significantly higher rates of failure than other funds, thereby reducing the impact of such trading behavior on security prices.     

Sentimental mutual fund flows

We show that many stylized empirical patterns for mutual fund flows are driven by investor sentiment. Specifically, when sentiment is high, investors exhibit a stronger tendency of chasing past fund performance; fund flows are less sensitive to fund expenses; and investors are attracted more to funds with sheer visibility. Moreover, the well‐documented positive relation between fund flows and future fund performance is significant only during high sentiment periods and is mainly driven by expected component of fund flows. Finally, we show that mutual fund investors exhibit a significantly negative timing ability at the individual fund level when sentiment is high.     

What do mutual fund managers’ private portfolios tell us about their skills?

I study a registry-based dataset of Swedish mutual fund managers’ personal portfolios. The majority of managers do not invest personal wealth into the very same funds they professionally manage. The managers who do invest personal money into their funds subsequently outperform the managers who do not. The results suggest that fund managers, in contrast to regular investors, are certain about their ability to generate an abnormal return, or lack thereof, and invest their personal wealth accordingly.     

AN EMPIRICAL ANALYSIS OF MUTUAL FUND EXPENSES

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.     

证券投资基金规模适度性研究——基于中国市场的证据

随着社保、养老金等中长期资金的大规模入市,中国公募基金规模面临更快扩张,那么基金规模究竟是可以无限扩张还是存在制约？本文研究发现,基金规模扩张会受到基金经理与投资者之间的委托代理冲突、边际规模报酬递减、投资者大规模赎回的制约。基于此,本文提出了基金管理规模适度区间的概念及其相应计量模型,并借此对2011—2019年间中国公募基金市场规模的适度性进行实证判断和检验,结果显示:(1)中国公募基金的平均管理规模在2015年之前过大,2016年之后趋向适度,而在2019年出现偏小现象。(2)中国基金市场规模适度区间的上、下限呈现逐年减小趋势,但二者的差值,即适度性区间的宽度却逐年增加。(3)规模适度基金的业绩表现远好于规模不足和规模过大两类基金,但市场上的规模适度基金占比则小于另外两类基金。最后,本文就如何提升公募基金,尤其是对安全性和盈利性要求更高的养老保险基金的规模适度性提出了相应对策建议。     

Reputation stretching in mutual fund starts

This study examines the role of reputation stretching in the context of mutual funds. We show that the reputation stretching strategy increases net fund inflows to new funds run by well-performing fund managers and yields a net increase of fund inflows to fund families. Reputable fund managers exhibit one-year performance persistence for managing new funds, which can help investors assess managers when selecting funds. We also find that the decrease in information asymmetry associated with managerial reputation benefits investors by leading to an increase in new fund returns in the short run, compared to those of new funds run by managers without track records. Overall, the reputation stretching strategy benefits both investors, by reducing information asymmetry and improving investment returns, and fund families, by increasing net fund inflows to new equity funds.