An Exploration of the Conditional Timing Performance of UK Unit Trusts

Abstract:  We examine the conditional market timing performance of UK unit trusts between January 1988 and December 2002. We find no evidence of superior conditional market timing performance by UK unit trusts either across different portfolios of trusts or by individual trusts. We also find that benchmark investing is significant for UK unit trusts and trusts have high numerical risk aversion to deviations from the benchmark. Our findings suggest that UK trusts act like benchmark investors.     

A comparative performance of conventional and Islamic unit trusts: Market timing and persistence evidence

It is expected that the returns and resistance of Islamic mutual funds will be different from conventional mutual funds as the former have limited choices for portfolio diversification. This article analyses the performance of conventional and Islamic unit trusts for the period February 1995 to July 2012 in the Malaysian market, one of the most developed Islamic mutual fund markets. The performance analysis is based on four parameters: (i) risk-adjusted returns of unit trusts; (ii) market timing abilities; (iii) selection performance; and (iv) persistence. The results of this study suggest that the returns of both conventional and Islamic unit trusts have outperformed the market throughout the sample period. The results for market timing and selectivity are mostly the same for both categories of funds. However, Islamic unit trusts seem to have better resistance to market downturn than conventional unit trusts. The results of this research can be used by investors to identify funds or create portfolios that are more suitable for a recessionary scenario and for fund managers to better manage their portfolio performance during times when markets are likely to fall. The findings in this article are highly relevant for policymakers, investors and fund managers to determine policy matters, deciding on investment and marketing strategy for Islamic mutual funds.     

Factors Associated with Differences in the Magnitude of Abnormal Returns Around NYSE Versus Nasdaq Firms' Earnings Announcements

This study provides an explanation for the 'exchange effect' puzzle documented in prior accounting research. Grant (1980) finds that the magnitude of earnings announcement week abnormal returns is higher, on average, for firms traded over-the-counter than for NYSE firms. Atiase (1987) shows that this incremental 'exchange effect' persists even after controlling for firm size. We investigate potential explanations for this incremental exchange effect. We first show that even after controlling for differences in firm size, Nasdaq firms have less rich information environments and enjoy greater growth opportunities than NYSE firms. We then investigate whether differential predisclosure information environments and/or growth opportunities can explain the incremental exchange effect. The results indicate that although the absolute magnitude of the earnings announcement-related abnormal returns is inversely related to proxies for the amount of predisclosure information, the incremental exchange effect cannot be explained by differences in the predisclosure information environment. In contrast, after controlling for differences in growth opportunities across NYSE versus Nasdaq firms, and investors' heightened sensitivity to Nasdaq firms' growth opportunities in particular, there is no significant incremental exchange effect (whether or not we control for predisclosure information). These results suggest that the incremental exchange effect puzzle documented in prior research is more likely to reflect growth-related phenomena than differences in the predisclosure information environment.     

Performance Evaluation Of U.K. Unit Trusts Within The Stochastic Discount Factor Framework

We examine the performance of U.K. unit trusts between January 1982 and December 1996 within the stochastic discount factor approach across a wide class of models. No one model dominates the others in correctly pricing passive portfolios or detecting superior performance for hypothetical trading strategies. We find no evidence of significant superior performance by the unit trusts for any model of the stochastic discount factor. Also, the charges of the trust have a mixed effect on trust performance.     

Smart Money and Small Funds

This study extends the literature on the relationship between recent performance and the movement of managed funds' assets by investigating the effects of fund size and age. The results confirm a size effect, as well as an age effect. Tests distinguishing between the two favor a size rather than an age interpretation. The evidence that flows of small funds are more sensitive to recent performance than flows of large funds is consistent with Gruber's (1996) notion of sophisticated investors using information in past performance to identify superior funds. Zheng's (1998) evidence that the good performers tend to be small funds suggests that the smart money should be following small funds, as confirmed in this study. Support for the 'smart money size effect' is also provided here with evidence confirming that small funds tend to be superior performers.     

Arbitrage Bounds and UK Unit Trust Performance

Abstract:  We use the arbitrage performance bounds of Ahn, Cao and Chretien (2003) to evaluate UK unit trust performance between January 1988 and December 2002. We find that trust performance is sensitive to the admissible stochastic discount factor used for both the average trust and the majority of individual trusts. The investment style, size, load charge, and annual charge of the trust all have an impact on trust performance. We find for some trusts, the Jensen (1968) and Ferson and Schadt (1996) measures do not satisfy arbitrage bounds by the base assets.     

An Examination of UK Unit Trust Performance within the Arbitrage Pricing Theory Framework

This paper examines the performance of a sample of 101 United Kingdom unit trusts within an Arbitrage Pricing Theory framework and considers the relationship between performance and the investment objective, size and expenses of the trusts. Also, portfolio strategies using past trust performances to rank the trusts fails to generate significant abnormal returns relative to two different benchmark portfolios.     

Time series versus cross-sectionally derived predictions of future cash flows

We refine the analysis of annual cash-flow prediction models originally developed and tested by Dechow et al. (1998), Barth et al. (2001) and Kim and Kross (2005) using cash flow from operations data reported in accordance with FASB Standard No. 95 for a constant sample of 1111 firms. We estimated annual cash-flow prediction models both cross-sectionally and on a time-series basis to assess whether restricting firm-specific parameter estimation in the cross-sectional approach adversely affects predictive performance. Predictive ability is assessed via “out-of-sample” forecasts in an inter-temporal holdout period (2001-2005) not used in model estimation. We provide new evidence that significantly greater enhancement to predictive performance is obtained when cash-flow prediction models are estimated on a time-series basis versus cross-sectionally. These inferences are robust across one-year ahead cash-flow predictions or one-thru-five-year ahead predictions. We find that the relative accuracy of cash-flow predictions is unaffected by whether the aforementioned prediction models employ cash flows or net earnings as independent variables. Finally, we also provide evidence that the predictive ability of cash flows is highly sensitive to firm size. That is, relatively larger firms provide significantly more accurate cash-flow predictions than those of smaller firms across cash-flow prediction models.     

Timing,earnings management and over-reaction around pure placings

This paper provides new evidence about firms conducting pure placings in the UK. It examines their abnormal performance (stock and operating), earnings management (accrual and real activities) and abnormal growth prospects for up to three years surrounding the event. It questions whether (i) timing, (ii) earnings management and/or (iii) over-reaction hypotheses can explain these performance, earnings quality and growth paths. The results document that pure placing firms have high earnings quality and abnormally high growth opportunities at the announcement. For this reason, the market is overenthusiastic. It expects more than what is eventually fulfilled, in line with the over-reaction hypothesis. Weak evidence that placing firms may exploit market timing is noted, whilst there is no supportive evidence of earnings management. These findings distinguish the earnings quality and growth opportunities of pure placing firms from that of firms conducting open offers, firm commitment offers and other seasoned equity offerings (SEO) that are not private placements, for which prior evidence reports mainly timing and/or earnings management prior to the event. This paper facilitates a better understanding of UK SEO.     

Persistence and the four‐factor model in the Australian funds market: a note

We investigate whether Australian fund managers are able to deliver persistent performance using Carhart’s (1997) four‐factor model. Short‐ and long‐term persistence is examined and the sample is also divided into unit trusts and superannuation funds. We do not find evidence of persistence in any sample of funds. We find that winner (loser) funds tend to hold past winner (loser) stocks. Winner and loser unit trusts both appear to have positive exposure to small stocks.     

The causal effect of board size in the performance of small and medium-sized firms

Empirical studies of large publicly traded firms have shown a robust negative relationship between board size and firm performance. The evidence on small and medium-sized firms is less clear; we show that existing work has been incomplete in analyzing the causal relationship due to weak identification strategies. Using a rich data set of almost 7000 closely held corporations we provide a causal analysis of board size effects on firm performance: We use a novel instrument given by the number of children of the chief executive officer (CEO) of the firms. First, we find a strong positive correlation between family size and board size and show this correlation to be driven by firms where the CEO’s relatives serve on the board. Second, we find empirical evidence of a small adverse board size effect driven by the minority of small and medium-sized firms that are characterized by having comparatively large boards of six or more members.     

Leverage and Taxes: Evidence from the Real Estate Industry

Finance theory has long viewed corporate income taxes as a potentially important determinant of corporate financing decisions and capital structures. But finance academics have been unable to provide convincing empirical evidence of a material effect of taxes on corporate leverage, in part because of difficulties in constructing an effective proxy for marginal corporate tax rates, and hence for the tax benefits of debt, for large samples of individual companies. The authors address this by analyzing leverage decisions in an industry whose publicly traded entities are organized either as taxable corporations, or as real estate investment trusts (REITs) that effectively avoid entity level taxation. This enables them to measure the relative tax benefits of debt with greater precision while controlling for important nontax characteristics that affect debt usage. The tax hypothesis predicts that for real estate firms with similar asset portfolios, taxable firms should have more debt than their nontaxable counterparts. Both the nontaxable and the taxable real estate firms in our sample routinely have more than twice the leverage of industrial firms, which suggests that factors other than taxes are contributing to their use of debt. But among real estate firms, tax status appears to play a much weaker role. Taxable firms have significantly more leverage only after 2000, when restrictions on REITs were removed through new regulations that made their operations much more like those of taxable real estate firms. Our findings also depend on real estate characteristics—most notably, only residential real estate firms demonstrated differences that are consistent with the tax hypothesis. Taken together, the authors’ findings suggest that although taxes do seem to matter, their role is clearly secondary relative to factors such as the nature of the firm’s assets. A generous interpretation of our evidence puts the effect of taxes between one‐third and one‐half of that implied by prior research.     

Antecedents and Consequences of Eco‐Control Deployment: Evidence from Canadian Manufacturing Firms

Environmental issues have become an important consideration for a growing number of organizations. Eco‐control may represent a valuable tool to help organizations address such issues. The aim of this study is to provide an overview of the eco‐control practices adopted by Canadian organizations and to understand the antecedents and consequences of their adoption. More specifically, this study examines (i) the extent to which eco‐control practices are deployed within organizations, (ii) the factors and motivations that lead organizations to implement eco‐control practices, and (iii) the impact of adoption on firms’ managerial and operational environmental actions as well as on environmental and economic performance. Using survey data from a sample of 249 Canadian manufacturing firms, this article shows that environmental missions, environmental policies, environmental strategic planning, environmental budgets and environmental performance indicators are the most frequently adopted eco‐control practices among the investigated firms, while environmental incentives seem to be less frequently adopted. The results of this study also suggest that competitive and ethical motivations as well as size, environmental exposure and stakeholder pressure are all important factors in explaining eco‐control practice adoption by Canadian manufacturing firms. Moreover, the results of this study show that organizations that have undertaken more intensive managerial and operational environmental actions have also adopted more intensive eco‐control practices. Organizations adopting more intensive eco‐control practices perform better both environmentally and economically performance than firms adopting less intensive eco‐control practices.     

International comparative analysis of the association between board structure and the efficiency of value added by a firm from its physical capital and intellectual capital resources

This study investigates the link between corporate board features and corporate performance for a sample of 286 publicly traded firms from South Africa (84 firms), Sweden (94 firms), and the UK (108 firms). Corporate board features considered are board composition, inside director ownership, duality and board size. In contrast to prior literature, performance is defined as the efficiency of value added (VA) rather than in financial terms. Further, the analysis examines the association between board features and efficiency of VA and each of the firm's physical capital (PC) and intellectual capital (IC), respectively. Finally, the present study analyzes the association between board features and corporate performance conjointly. Comparable to general findings from studies using U.S. data, the empirical analysis as a whole did not discern consistent significant link between the four board features and corporate performance across the three nations. However, individual board features are found to influence corporate performance in isolated cases. Overall, results provide evidence that even under different sociopolitical and economic conditions, governance needs vary across firms. Consequently, these findings do not lend support to the notion that uniform board structures should be mandated.     

THE ECONOMIC EXPOSURE OF U.S. MULTINATIONAL FIRMS

In this paper we find that the exchange rate exposure of individual firms increases with the return horizon. Also, the cross-sectional differences in the magnitude of exposure of individual firms are significantly related to firm size but not to the relative portion of foreign sales to total sales. The empirical evidence is consistent with the hypothesis that hedging activities exhibit economies of scale, and, consequently, the magnitude of economic exposure is less for larger firms than for smaller firms.     

Do We Have a Redundant Set of Cost–Efficiency Targets in the NHS?

There has been a long history of hospital trust cost–efficiency targets being used in the National Health Service (NHS), but there is little evidence about whether they are effective in reducing hospital unit costs and reducing the dispersion of unit costs between trusts. In 1997, the new Labour government announced that it would replace the purchaser efficiency index with a new approach to securing cost–efficiency gains from trusts. Since 1999/2000 trust efficiency targets have been based on reference costs. This article presents evidence to suggest that efficiency targets have not been effective and that the new reference cost based system of targets is irrelevant. The efficiency gains that trusts seek to achieve are those that emerge from the purchaser funding formula and the contracting process.     

Evidence of a bank lending channel in the UK

Using balance sheet data for a panel of UK listed firms, we find evidence of a bank lending channel of monetary transmission. A higher interest rate induces more bank lending to listed companies, but this effect diminishes if monetary policy becomes tight enough to impose severe constraints on bank loan lending. The dynamic behaviour of bank debt versus non-bank debt shows that the lending channel works through cutting back loan supplies to small, bank-dependent firms while restricting the bank’s ability to provide financial assistance to other firms. We see cross-sectional differences between bank-dependent and non-bank-dependent listed companies, and between listed and non-listed companies: Both can contribute to the size effect of investment. Small firms bear most of the reductions in bank loan supplies, and since they do not have many alternatives to bank finance, they suffer more from monetary tightening than big firms. This is consistent with inventory behavior. Furthermore, we have found that big, non-bank-dependent firms can benefit more from the bank–firm relationship than small, bank-dependent firms.     

Performance implications of strategic performance measurement in financial services firms

This study examines the relation between measurement system satisfaction, economic performance, and two general approaches to strategic performance measurement: greater measurement diversity and improved alignment with firm strategy and value drivers. We find consistent evidence that firms making more extensive use of a broad set of financial and (particularly) non-financial measures than firms with similar strategies or value drivers have higher measurement system satisfaction and stock market returns. However, we find little support for the alignment hypothesis that more or less extensive measurement than predicted by the firm's strategy or value drivers adversely affect performance. Instead, our results indicate that greater measurement emphasis and diversity than predicted by our benchmark model is associated with higher satisfaction and stock market performance. Our results also suggest that greater measurement diversity relative to firms with similar value drivers has a stronger relationship with stock market performance than greater measurement on an absolute scale. Finally, the balanced scorecard process, economic value measurement, and causal business modeling are associated with higher measurement system satisfaction, but exhibit almost no association with economic performance.     

The impact of board size on firm performance: evidence from the UK

We examine the impact of board size on firm performance for a large sample of 2746 UK listed firms over 1981–2002. The UK provides an interesting institutional setting, because UK boards play a weak monitoring role and therefore any negative effect of large board size is likely to reflect the malfunction of the board's advisory rather than monitoring role. We find that board size has a strong negative impact on profitability, Tobin's Q and share returns. This result is robust across econometric models that control for different types of endogeneity. We find no evidence that firm characteristics that determine board size in the UK lead to a more positive board size–firm performance relation. In contrast, we find that the negative relation is strongest for large firms, which tend to have larger boards. Overall, our evidence supports the argument that problems of poor communication and decision-making undermine the effectiveness of large boards.     

Investment style positioning of UK unit trusts

We investigate the investment style positioning of UK equity unit trusts (mutual funds) over the 24-year period from 1987 to 2010 and assess if fund manager claims to follow a particular style strategy are evidenced in practice. Generally, UK unit trusts do not, in fact, consistently track declared styles but subject their funds to style switching or rotation. Nor do funds switch to become simple index trackers, as has widely been reported, but exhibit a mix of behaviour that we refer to as ‘market-momentum styling’. Our contribution is to offer a coherent, end-to-end picture of the evolution of investment styles over an economic cycle. In so doing we evidence that fund style positioning is subject to rotation and becomes subordinated to past portfolio performance or style momentum. Even this result is conditional as we go on to demonstrate that style investment is very likely to be driven by broader economic conditions, thereby creating market-momentum styling by default. This is arguably not a style at all and calls into question the intent behind fund ‘strategies’.