A note on closet-indexing

Actively managed equity mutual funds with returns that are highly correlated with popular stock market indices like the S&P 500 often are accused of “closet-indexing”. We ask whether a trading strategy that shorts these funds and buys “true” index funds makes money for investors. Using a sample of high-R² growth-and-income funds from the CRSP survivor bias free mutual fund file, we document that the Sharpe ratio of this trading strategy and the market Sharpe ratio are statistically indistinguishable in the 1991–2000 sample period. The result is consistent with the view that widespread closet-indexing does not exist in the mutual fund industry.     

Private equity performance and capital flows: Evidence from China

For more than 1500 private equity funds in China over the period from 1992 to 2013, we construct fund level performance metrics with investment level return data and examine performance and capital flows. The median (mean) fund IRR, net of fees, is 9.0% (51.7%), based on a sample that controls for survivorship bias. Fund IRRs are neither related to fund own characteristics, such as fund size, nor to overall market conditions around the time when the fund is raised. Competition reduces fund performance: returns are lower when there are many competitors entering the industry at the same time. Although experienced partnerships are more likely to raise a follow-on fund and to raise more capital, fund performance is not related to general partnership (GP) investment experience. Further, there is no performance persistence across funds managed by the same GP. Lastly, there is some evidence of investor maturity when judged on GPs' historical performance. This evidence characterizes a burgeoning yet immature PE industry in China.     

Gravitation Toward Prior Performance in Mutual Fund Advertisings: Do Consumer Investors' Processing Abilities Account for Biased Information Processing?

This study examines the cognitive processes involved in consumer investors' information processing of mutual fund characteristics. We tested whether consumer investors' limited processing abilities account for biased return perceptions, as reported in the literature. Consumer investors' processing abilities were manipulated by varying the duration of information exposure time to a mutual fund advertisement. Experimental results suggest that a longer time spent by consumer investors learning about mutual fund characteristics resulted in reduced reliance on prior fund performance as a heuristic cue, which in turn resulted in an unbiased processing of mutual fund characteristics. In contrast, when consumer investors spent less time learning about mutual fund characteristics, prior fund performance significantly affected subsequent return expectations and argument persuasiveness of the mutual fund advertisement. These findings suggest that disclaimers warning that past performance does not guarantee future results are ineffective when consumer investors have limited attention and lower processing abilities .     

Harmony,Justice, Confusion,and Conflict in Family Firms: Implications for Ethical Climate and the “Fredo Effect”

In this study, we analyze the financial performance and the managerial abilities of religious mutual fund managers, implementing a comparative analysis with conventional mutual funds. We use a broad sample, free of survivorship bias, of religious equity mutual funds from the US market, for the period from January 1994 to September 2010. We build a matched-pair conventional sample in order to compare the results obtained for both kinds of mutual fund managers. We analyze stock-picking and market timing abilities, topics widely neglected for the specific case of religious mutual fund managers. We also study style timing abilities. As far as we are aware, this aspect has not been studied previously for religious mutual fund managers. Our results indicate that religious mutual fund managers underperform both the market and their conventional counterparts. This result is driven by negative stock-picking ability which could be generated by excluding “Sin” stocks from their portfolios. Moreover, they are not able to time the market or any of the following styles: size, book-to-market, and momentum.     

The Ethical Mutual Fund Performance Debate: New Evidence from Canada

Although the academic interest in ethical mutual fund performance has developed steadily, the evidence to date is mainly sample-specific. To tackle this critique, new research should extend to unexplored countries. Using this as a motivation, we examine the performance and risk sensitivities of Canadian ethical mutual funds vis-à-vis their conventional peers. In order to overcome the methodological deficiencies most prior papers suffered from, we use performance measurement approaches in the spirit of Carhart (1997, Journal of Finance 52(1): 57–82) and Ferson and Schadt (1996, Journal of Finance 51(2): 425–461). In doing so, we investigate the aggregated performance and investment style of ethical and conventional mutual funds and allow for time variation in the funds’ systematic risk. Our␣Canadian evidence supports the conjecture that any␣performance differential between ethical mutual funds and their conventional peers is statistically insignificant.      

风险-收益悖论与绩差基金的业绩持续性

绩差基金的业绩具有持续性,这种现象为何产生,现有文献对此缺乏研究。文章从前景理论和金融市场的异常现象——风险-收益悖论出发,分析绩差基金业绩持续的原因,并提出一种解释这种原因的假说。文章利用我国开放式基金的数据,对这个假说进行了实证检验,检验结果证实：业绩排名落后时基金经理偏好冒险的决策行为,承担高风险却没有得到高收益补偿,是绩差基金业绩持续的重要原因。     

Are socially responsible exchange-traded funds paying off in performance?

This study examines the Socially Responsible (SR) exchange-traded funds (ETFs) by comparing their risk-adjusted performance with a matched group of conventional ETFs in the U.S. equity market. In contrast to prior studies that focus on actively managed mutual funds, we find that the risk-adjusted returns of SR ETFs are significantly lower than those of conventional ETFs during the 2005–2020 period. Such underperformance is only observed in non-crisis periods but not in economic crisis periods (i.e., the 2020 pandemic recession and 2008 financial turmoil). We attribute the observed underperformance of SR ETFs during the non-crisis periods to their limited diversification of unsystematic risks resulting from various negative or positive screens employed in the funds. We also find that net fund flows of the SR ETFs are less sensitive to past negative performance than are conventional fund flows. Collectively, our findings suggest that, instead of seeking wealth maximization, socially conscious investors may choose SR ETFs to gain non-economic utility.     

The Growth – Profit Nexus

In this paper we investigate the relative importance of firm and market effects on the profitability of a sample of independent, unquoted U.K. firms over the period 1991–1993. Specifically, we attempt to isolate the effects of internal governance, given that the typical firm is closely held in terms of its shareholdings and has a high degree of owner control. Our findings suggest that there is no short-run growth – profit trade-off of the type outlined by Marris. In fact growth and profits move in parallel. Further, there is a significant degree of profits persistence.     

Mutual Fund Performance and Persistence in Taiwan: A Non-Parametric Approach

This paper applies data envelopment analysis (DEA) to measure the performance of Taiwan domestic equity funds during the period 1999 to 2003. To test performance persistence, we first divide the sample funds into low efficiency (0–25th percentile), middle efficiency (26th–75th percentile), and high efficiency (76th–100th percentile) groups according to their rankings on technical efficiency (TE) and Sharpe ratios, respectively. Then, based on the previous one-, two-, and three-year performances of the sample funds, we employ iterative seemingly unrelated regressions to analyse the persistence of sample fund performance. The results show that there exists a significant ‘hot hands’ effect in Taiwan domestic equity funds under the TE measure, but not under the measure of Sharpe ratios. The paper concludes that the different results in performance persistence analyses between the above two measures is driven by the DEA taking transaction costs into consideration.     

The US stock market and the international value of the US dollar

We investigate the spillover effect of the US equity market on the value of the dollar and therefore on the return and volatility of US equity investments for the international investor. The data are daily observations of the S & P 500 and the US dollar in terms of seven foreign currencies covering the period 1971–2002. Using Geweke measures of feedback, we find a high percentage of contemporaneous association between daily movements in the S & P 500 index and changes in the value of the dollar. A consistently positive relationship between the S & P 500 and the dollar is found for the period 1992–2002, creating a compounding effect for the foreign investor in US equities. However, investment by foreigners in US equities did not result in consistently higher returns but in higher volatility compared to their US counterparts for the period 1971–2002.     

农村资金互助社绩效评价研究——基于安徽太湖的案例

农村资金互助社是解决三农融资难的重要载体,但不同类型的资金互助社发展状况各异。为引导农村资金互助社健康发展,根据农村资金互助社的制度特征,从经营绩效、社会绩效两个方面构建绩效评估指标体系,并选择安徽太湖的两类资金互助社进行案例研究,结果发现银监会批准的资金互助社和专业合作社内部的资金互助社都取得了较好的经营绩效和社会绩效,但后者的社会绩效要优于前者,而前者的经营绩效要优于后者。     

Small firm mutual funds: Additional evidence on the small firm effect

Returns generated with small firm mutual fund data are used to examine the extent to which identification of a small firm effect is due to the difficulty in measuring the direct and indirect transaction costs involved in investing in the common shares of small capitalization stocks. Little if any evidence of the excess risk-adjusted returns is obtained for either of the period 1978–1983, when the small firm effect was observed, or the period 1984–1989, when it was not. The small firm effect may therefore be attributed to (1) higher direct transaction costs including bid-ask spread and broker fees and (2) higher indirect transaction costs including portfolio management expenses and market impact costs.The authors thank an anonymous referee for helpful comments on an earlier version of this paper, and Brett Salazar for valuable assistance in data collection. Errors remain our own.     

Managerial Performance and Closed‐End Country Fund Premiums: A Lead or Lag Relationship?*

Herein, we examine whether changes in closed‐end country fund premiums lead and/or lag management performance. Using a sample of 46 country funds and a time period of 11 years, we find evidence of a significant negative relationship between past performance and current fund premiums, but no support for the hypothesis that past premiums are indicative of future performance. Furthermore, the above results are driven primarily by the emerging market funds. The difference between emerging market and developed market fund premiums' response to past performance, although less obvious, continues to hold in the crises period, but vanishes in the tranquil period.     

Adherence of Retirement Mutual Fund Providers to the Securities and Exchange Commission (SEC)’s Advertising Guidance: Provision and Readability of Advertising Disclosure

This research provides an initial investigation of whether US retirement mutual fund providers complied with the Investment Company Advertising Rules (2003) adopted by the Securities and Exchange Commission (SEC). A content analysis was used to examine advertising disclosures presented in 953 retirement mutual fund magazine advertisements from 2004 to 2010 based on SEC’s advertising guidance. The results suggest that during the given period, retirement mutual fund providers generally presented mandatory and triggered advertising disclosures, but paid less attention to the readability of advertising disclosures. Implications for regulators, consumer groups, and financial services marketers are discussed in light of financial literacy and consumer welfare.     

Self-employment Wealth and Job Creation: The Roles of Gender,Non-pecuniary Motivation and Entrepreneurial Ability

This paper uses National Child Development Study data for a large cohort of British individuals, to explore the influence of education, inheritance and other background characteristics on the propensity to become self-employed; and also on subsequent success, as measured by job and wealth creation. For the first time, we study the effects of our regressor variables on our success measures via disaggregation of our sample by gender – and, in this way, reveal striking differences between the determinants of male and female entrepreneurial performance.     

Regulating Information Disclosure in Mutual Fund Advertising in the United States: Will Consumers Utilize Cost Information?

Consumer decision making with regard to mutual funds is less than rational. Consumers tend to focus on past performance and virtually ignore a variable which has a more definite (and negative) impact on wealth—cost. FINRA, the mutual fund industry’s self-regulatory body in the USA, has recently changed its regulations for fund advertising to require that cost information be reported when performance information is present. We conducted an exploratory conjoint study to examine whether consumers might, in fact, use the additional information, and found that despite the highly salient presence of expense information, consumers overwhelmingly continue to use past performance when forming mutual fund preference.     

The Information Content of Mutual Fund Print Advertising

The mutual fund industry has experienced tremendous growth in recent years. During this time period mutual funds have become somewhat of a commodity with many funds using advertising to attract investors. The current study uses content analysis to determine the informational content of fund advertising. The results indicate that while the average number of informational cues increased during the time period 1979 to 1989, there was no significant increase in the information content of mutual fund advertising between 1989 and 1999. Relatively few funds include information such as loads, 12b‐1 fees, and expense ratios in their advertisements, and fund ads rarely discuss risk.     

Interpreting cross-section and time-series tests of convergence: the case of labor productivity in manufacturing

This paper investigates whether a disaggregated measure, labor productivity in manufacturing, is converging across eight OECD countries during the period 1950–1998 using both cross-section and time series tests of convergence. The evidence indicates convergence using either test for the full sample, but tests over subperiods suggest that the dynamics of the underlying series change from economies in transition in the early years to economies in balanced, but parallel, growth paths in the later period. The results confirm that the appropriate test for convergence depends on the underlying structure of the data.     

SMEs and CSR Theory: Evidence and Implications from an Italian Perspective

This paper reviews the development of socially responsible investment (SRI) in the Spanish financial market. The year, 1997 saw the appearance in Spain of the first SRI mutual fund, but it was not until late 1999, that major Spanish fund managers offered SRI mutual funds on the retail market. The development of SRI in the Spanish financial market has not experienced the high levels of development seen in other European countries, such as France or Italy, where interest in SRI began during the same period. This paper presents an analysis of the impact of SRI mutual funds managed by Spanish fund managers comparing the evolution of managed assets and number of investors. We also analyse the investment strategies adopted by these funds, which mainly use negative screening criteria and the participation of non-governmental organisations as institutional investors. An analysis of the take up of socially responsible investment in the Spanish financial market shows majors deficits in this process. This is due to Spanish investors having limited sensitivity to social issues and knowledge of SRI, and a lack of development of SRI investment strategies, such as engagement or shareholder activism by fund managers. Furthermore, the take-up of SRI mutual funds in the Spanish financial market coincided with a fall in the stock market at the beginning of the 21st Century. We conclude with an analysis of the relationship between SRI and Corporate Social Responsibility (CSR).Josep M. Lozano is currently Professor in the Department of Social Sciences at ESADE, Universidad Ramon Llul-URL and Director of the school’s Institute for the Individual, Corporations and Society (IPES). Co-founder of ética, Economía y Dirección (Spanish branch of the European Business Ethics Network), member of the international Editorial Board of ‚Ethical Perspectives’ and member of the Business Ethics inter-faculty group of the Community of European Management Schools (CEMS). He has been a highly-commended runner-up in the European division of the Beyond Grey Pinstripes Faculty Pioneer Award. Author of Ethics and Organizations. Understanding Business Ethics as a Learning Process. Dordrecht: Kluwer, 2000.Laura Albareda is a Researcher at the Institute for the Individual, Corporations and Society (IPES), ESADE, Universidad Ramon Llull-URL. She is manager of the Observatory on Ethical, Ecological and Social Investment funds in Spain, an annual IPES publication on Socially Responsible Investment in Spain. Fields of research and academic interest are Corporate Social Responsibility, Business Ethics, Global Governance, Governments and Public Policies on CSR and Socially Responsible Investment.M. Rosario Balaguer is a Lecturer in the Department of Finance and Accounting at Universitat Jaume I. Research areas focus on finance-based analysis of Corporate Social Responsibility and Socially Responsible Investment, covering issues such as profitability, risk and performance. She has taken part in several national and international conferences and published a number of articles in this field.     

The Use and Abuse of Mutual Fund Expenses

Prior research shows that mutual fund investors are often aware of up-front charges like sales loads, but they are less mindful of annual operating expenses, even though both types of fees lower overall performance. This study documents the historical trend and recent abuse of annual mutual fund expenses. As the industry becomes more adept at segmenting customers by level of investment sophistication, we claim that load mutual fund companies take advantage of this ability and charge higher expenses to their target customer: the less-knowledgeable investor. No-load fund companies, which tend to attract the more sophisticated investor, offer lower expenses. For example, over 2000–2004 the average annual expense ratio of load equity funds was 50 basis points higher than no-load equity funds. We show evidence of this widening cost disparity since the early 1990s among new and existing equity, bond, and index funds. We also document a growing abuse of sales distribution or 12b-1 fees among funds that are closed to new investors, almost all of which are load funds. Thus, load fund investors are more susceptible to paying higher expenses and receiving lower returns over time. Todd Houge is an Assistant Professor of Finance at the University of Iowa. Jay Wellman is an Assistant Professor of Finance at Binghamton University.