The attributes,behavior, and performance of U.S. mutual funds

This article examines the risk and return characteristics of U.S. mutual funds. We employ an equilibrium version of the Arbitrage Pricing Theory (APT) and a principal-components-based statistical technique to identify performance benchmarks. We also consider the Capital Asset Pricing Model (CAPM) as an alternative. We implement a procedure for overcoming the rotational indeterminacy of factor models. This procedure is a hybrid of statistical factor estimation and prespecification of factors. We estimate measures of timing ability for the CAPM and extend it to the APT. We find that this timing test is misspecified due to noninformation-based changes in mutual fund betas. We develop a modification of the timing measure that, under certain conditions, distinguishes true timing ability from noninformation-based beta changes.     

Competition among mutual funds

We examine the impact of the entry of new mutual funds on incumbents using the overlap in their portfolio holdings as a measure of competitive intensity. This simple metric delivers powerful economic results. Incumbents that have a high overlap with entrants subsequently engage in price competition by reducing management fees. Distribution fees, however, rise so that investors do not benefit as much from price competition. Funds with high overlap also experience quantity competition through lower investor flows, have lower alphas, and higher attrition rates. These effects only appear after the late 1990s, at which point there appears to be an endogenous structural shift in the competitive environment. We conclude that the mutual fund market has evolved into one that displays the hallmark features of a competitive market.     

Comparative measures of performance for U.S.-based international equity mutual funds

This paper compares an international two-index model to an International Arbitrage Pricing Theory (IAPT) two-factor model to evaluate the performance of 37 U.S.-based international mutual funds over the 1985–1993 period. Results from the index model confirm prior research that international funds perform as well as the market proxy. In contrast, the IAPT model implies superior investment performance by the international funds. Moreover, the two models produce different relative performance rankings. Intertemporal comparisons of the models indicate that the multifactor IAPT model better reflects the international equity return-generating process.     

Forecasting correlation among equity mutual funds

Investors often buy multiple funds that are actively managed, specializing within narrowly defined market segments. To successfully implement a strategy of diversification investors must obtain accurate estimates of correlation among mutual fund returns. This paper forecasts mutual fund correlations using eight models that are broadly classified into historical, mean and index. Results indicate that estimate of future correlations from the Multi-Style Index, Dynamic and Fama–French 3-Factor models have the lowest prediction errors. Moreover, the relative ranks of Multi-Style Index and Fama–French 3-Factor models have lower dispersion across different forecasting time periods and in sub-samples of funds belonging to similar or different ‘style’ categories.     

Conditional performance, portfolio rebalancing, and momentum of small-cap mutual funds

To assess the performance of small-cap stocks net of transaction costs, we analyze 165 actively managed small-cap oriented portfolios. Our analysis addresses three areas of interest: (i) performance net of transaction costs, (ii) the magnitude of trading costs incurred when rebalancing an actively managed portfolio, and (iii) the potential for momentum strategy profits when investing in small-cap stocks.Using conditional estimation, we find that small-cap funds have earned a significantly positive abnormal return of about 2% per year in the period January 1986 to December 2000. We also estimate the cost of January rebalancing to be 0.4% of portfolio value, a value that is significant for over 20% of the portfolios under study.Finally, after trading frictions are taken into account, we find evidence that small-cap portfolios exhibit significant return patterns, similar in nature to momentum patterns initially documented in a frictionless setting by [J. Finance 48 (1993) 65; J. Finance 56 (2001) 699]. Our findings support recent behavioral models, which attempt to explain these patterns. Consistent with the findings of Jegadeesh and Titman, we find that past “winners” continue to outperform in the next 12 months, followed by a performance reversal.     

Do mutual funds time the market? Evidence from portfolio holdings

Previous research finds insignificant market-timing ability for mutual funds using tests based on fund returns. The return-based tests, however, are subject to the “artificial timing” bias. In this paper, we propose and implement new measures of market timing based on mutual fund holdings. Our holdings-based measures do not suffer from the artificial timing bias. We find that, on average, actively managed U.S. domestic equity funds have positive timing ability. Market timing funds use non-public information to predict market returns, tend to have high industry concentration, large fund size, a tilt toward small-cap stocks, and are active in industry rotation.     

Monetary policy and portfolio rebalancing: Evidence from European equity mutual funds

In this study, we provide empirical evidence on the portfolio rebalancing of European equity mutual funds following both conventional (CMP) and unconventional monetary policies (UMP). We use 1772 equity mutual funds’ portfolio holdings over the period 2002Q4–2016Q4. This level of granularity allows us to characterise the funds’ asset allocation in different portfolio dimensions: the size, style, currency, and domicile of the stocks, and managers’ preferred investment strategies. Using a panel fixed effect estimator, our results support the existence of portfolio rebalancing across equity categories following UMP. European equity mutual funds’ assets are, on average, reallocated towards mid-cap, and core stocks and developing economies, and shifted away from small-cap and value stocks and home as well as developed countries. Furthermore, mutual funds seem to concentrate on their preferred and historical investment strategies. These two results suggest that managers are more willing to invest in safer and familiar stocks following UMP announcements thereby decreasing the risk of asymmetry of information. We finally show that the funds size, returns volatility and expense ratio affect the strength of the rebalancing.     

Closed-end country funds and U.S. market sentiment

Closed-end country funds can trade at large premiums and discountsfrom their foreign asset values (NAVs). Investigating this anomaly,we find that individual fund premiums move together, primarilybecause of the comovement of their stock prices with the U.S.market. Moreover, an index of country fund premiums differentiatessize-ranked U.S. portfolio returns and forecasts country fundstock returns. These findings suggest that international equityprices are affected by local risk. In particular, we show thatcountry fund premium movements reflect a U.S.-specific risk,which may be interpreted as U.S. market sentiment.     

Long-term U.S. infrastructure returns and portfolio selection

Our understanding of the long-term return behavior and portfolio characteristics of public infrastructure investments is limited by a relatively short history of empirical data. We re-construct U.S. listed infrastructure index returns by mapping their monthly performance to received systematic and industry risk factors from 1927 through 2010. Our findings reveal that the infrastructure returns in recent years may understate the tail-risk that investors could experience over the long-term, however, this tail-risk is commensurate with holding a broad portfolio of U.S. stocks. For mean-variance and mean-CVaR investors, we report the benefits of holding public infrastructure assets in investment portfolios.     

The performance of Japanese mutual funds

We analyze the performance of Japanese open-type stock mutualfunds for the 1981-1992 period. The results show that, regardlessof the performance measures and benchmarks employed, most ofthe Japanese mutual funds underperform the benchmarks by between3.6% and 10.8% per annum. These funds tend to invest more inlarge stocks with low book-to-market ratios. But this featuredoes not explain the underperformance. A potential explanationis the dilution effect caused by inflows of funds. In Japan,a new investor of an open-type fund only pays in the after-taxvalue of the net asset value. We conduct a bootstrap experimentto assess the magnitude of this dilution effect.     

The performance of hedge funds and mutual funds in emerging markets

Use of short selling and derivatives is limited in most emerging markets because such instruments are not as readily available as they are in developed capital markets. These limitations raise questions about the value added provided by hedge funds, especially compared to traditional mutual funds active in these markets. We use five existing performance measurement models plus a new asset-style factor model to identify the return sources and the alpha generated by both types of funds. We analyze subperiods, different market environments, and structural breaks. Our results indicate that some hedge funds generate significant positive alpha, whereas most mutual funds do not outperform traditional benchmarks. We find that hedge funds are more active in shifting their asset allocation. The higher degree of freedom that hedge funds enjoy in their investment style might thus be one explanation for the differences in performance.     

The rise and fall of WebTrust

While prior research mainly focused on the impact of third-party-certified web assurance seals on consumers' perceptions and purchasing behaviors, little research has been conducted on the managerial decision-making process about the selection, implementation, and the abandonment of such seals. Of particular interest here is the WebTrust seal, jointly developed by the AICPA and the CICA. We take a qualitative case study approach to understand the motivations and rationale of a large North American telecommunications firm's management behind the decisions about the selection, implementation, and abandonment of its WebTrust seal. Our case firm was one of the first to obtain the seal on its online shopping website. Semi-structured interview results suggest that the implementation and the subsequent abandonment of WebTrust may be explained by several theoretical frameworks — the managerial accounting perspective, organizational slack theory, innovation theory, and institutional theory. First, the case firm's leader attitude in innovation, its extra resources available, coupled with the endorsement of the accounting profession led to the implementation of WebTrust. Second, when the benefits of WebTrust versus its costs were questioned and other companies increasingly abandoned the seal, our case firm decided to follow this trend.     

The rise and fall of subsidiarity

The concept of subsidiarity is examined as a possible golden rule to be applied in restructuring the federal balance, ie the relationship between the EC, the member states and the regions. The concept of subsidiarity is used broadly to include an examination of the kind of institutional rearrangement that the EC is trying to define for itself. Four deficits (capacity, policy, implementation and democracy) of the present institutional set-up are reviewed in order to determine what kind of innovative arrangements need to be designed to enable the EC to face the challenges of the next decade. On the assumption that the process of integration has indeed become irreversible, two options in the institutional development towards political union are evaluated.     

The performance of US bond mutual funds

We evaluate the performance of the US bond mutual fund industry using a comprehensive sample of bond funds over a long time period from January 1998 to February 2017. In this one study, we examine bond fund selectivity, market timing and performance persistence. We evaluate bond funds relative to their self-declared benchmarks and in terms of both gross-of-fee returns and net-of-fee returns. We document considerable abnormal performance among funds both to the fund (gross returns) and to the investor (net returns). Bond fund performance is found to be superior in the post financial crisis period. However, past strong performance cannot be relied upon to predict future performance. Finally, while some funds exhibit market timing ability; we find a predominance of negative market timing among US bond mutual funds.     

The performance of global bond mutual funds

This paper studies the risk and return characteristics of global bond mutual funds during 1988–95. These actively managed funds did not demonstrate superior performance, net of expenses, against a wide range of benchmarks and performance was negatively related to fund expenses. During the sample period, returns on global bond funds were sensitive to exchange rate movements, even after controlling for local currency returns on country bond indices. The funds had high exposure to the European, the Canadian, and the US bond markets and were least sensitive to the Japanese Bond index and movements in Japanese Yen. The funds did not outperform a US Bond index, suggesting that expenses might have outweighed diversification benefits during the sample period.     

The performance of US equity mutual funds

The paper examines the performance of US no-load equity mutual funds. Fund performance is derived using stochastic frontier analysis for a flexible functional form. This analysis allows us to derive parametric estimates of efficiency scores for each fund in our sample for the first time in the literature. Our results indicate that US no-load equity funds display varying levels of efficiency over time but also depending on size and on investment style. Robustness analysis reaffirm the efficiency scores remain consistent across different selections of inputs and outputs as well as the underlying distribution of the return. Having estimated each fund’s efficiency in the sample we unveil their underlying dynamics, also with respect to risk and operational characteristics such as flows, assets, and Morningstar star ratings. Panel-VAR estimations reveal that the response of funds’ efficiency to a shock in risk is positive and substantial. Some evidence of reverse causality is also observed. Finally, we extend our analysis to investigate the relationship between funds performance and key covariates across subgroups defined by size.     

Uncertainty avoidance and mutual funds

We study how culture influences mutual funds around the world. Uncertainty Avoidance (UA), which is related to ambiguity aversion, is negatively associated with flow-performance sensitivity, deviation from the fund benchmark, fund alpha, and the fraction of active management across the 25 countries in our sample. This is true even when controlling for an exhaustive set of fund- and country-level characteristics. We also find that a fund's deviation from its benchmark is not only affected by the UA of its domicile country but also by the UA of its fund family's country of origin. Our results highlight the importance of considering cultural characteristics, and UA in particular, when studying mutual funds across countries.     

The rise and fall of normative control

Widely-publicized breaches of professional norms among accountants in the United States have kindled their interest in the problem of norms and normative control. This article discusses the current literature on norms. It suggests that normative control, which is always problematic, is especially so when agents are subject to the control of two or more principals having divergent interests. It is argued that the agent’s compliance will tend to flow to that principal upon whom the agent is most dependent. The analysis is illustrated by the case of the rise and fall of the Arthur Andersen accounting firm.     

The benefits of option use by mutual funds

Based on comprehensive regulatory data on equity mutual fund option use from the SEC's N-SAR filings, we are the first to present consistent evidence that equity funds' option use generates higher risk-adjusted performance. We further show that this is a direct effect of option use and not an indirect effect of other fund characteristics. Option use also directly results in lower systematic risk, as funds show significantly lower market betas during periods of options usage. Finally, mutual funds use options mainly for hedging as they primarily use protective puts and covered calls. These results are independent of known phenomena, such as the low beta anomaly, and robust to tests for endogeneity and a novel 5-factor model including an investable option strategy factor (IOS). Overall, our findings show that mutual fund option use is beneficial to investors and does not pose risk to the financial system as feared by the SEC. Our results are thus important for investors as well as regulators.