Mutual fund characteristics, managerial attributes, and fund performance

This study provides a comprehensive examination of recent mutual fund performance by analyzing a large set of both mutual funds and fund attributes in an effort to link performance to fund-specific characteristics. The results indicate that the hypothesized relationships between performance and the explanatory variables are generally upheld. After taking into consideration general market conditions and fund investment objective, the characteristic variables that relate to fund popularity, growth, cost, and management also explain performance. Finally, after controlling for survivorship and benchmark error as well as fund-specific factors, the results refute the performance persistence phenomenon.     

Mutual fund herding and audit pricing

This study investigates how investor trading behavior affects audit pricing by examining mutual fund herding in specific. When mutual fund managers herd due to information cascade, mimicking incentive, or agency problem, it causes information friction and weakens their monitoring effectiveness. Heightened governance risk is associated with higher audit risk and thus higher audit pricing. In our empirical tests, we find that herding weakens mutual funds’ information advantage and monitoring effectiveness, ultimately resulting in higher audit fees. To mitigate the endogeneity concern, we employ the natural experiment of the 2004 SEC regulation change on mutual fund disclosure frequency to capture exogenous change in herding intensity. Our findings are robust using propensity score matching method and alternative measures. Consistent with our conjecture, we document that firms facing stronger mutual fund herding are associated with deteriorated corporate disclosure quality.     

Active management, fund size, and bond mutual fund returns

Conventional wisdom holds that bonds are relatively homogenous investments compared to equities. Consequently, factors that explain variation in returns among bond mutual funds may differ in magnitude from those for equity mutual funds. In this study, a time-series cross-sectional analysis is employed to investigate the relationship between a bond fund's risk-adjusted return and specific fund attributes. Results indicate that a bond fund's past performance does not predict future performance and that bond fund managers are generally ineffective at increasing risk-adjusted returns. However, unlike equity mutual funds, bond mutual funds do appear to enjoy economies of scale.     

Mutual fund corporate culture and performance

In this paper we test if a mutual fund's own corporate culture predicts fund performance. To do this we use Morningstar's corporate culture ratings for mutual funds and then examine the ability of these corporate culture ratings to predict risk-adjusted performance of domestic equity funds over the period 2005–2010. Using methods that are robust to survivorship bias, we find there is little significant evidence that corporate culture predicts better fund performance. Indeed, we find that no individual component of the Morningstar stewardship rating including board quality, fees, manager incentives and regulatory issues is able to consistently predict fund performance.     

Termination Risk, Multiple Managers and Mutual Fund Tournaments

This study analyzes the risk-taking behavior of mutual funds in response to their relative performance over the 1992 to 1999 period. Our results show that managers of funds whose performance is closer to that of the top performing funds have greater incentives to increase their portfolios' risk than managers at the top who exhibit a tendency to lock in their positions. The evidence suggests that termination risk imposes a constraint on the risk taking behavior of under-performing fund managers and the winner takes all phenomenon generates a strong incentive for the fund managers to be the top manager. We also analyze the difference in the risk taking behavior of funds managed by multiple managers and single managers.     

Termination Risk, Multiple Managers and Mutual Fund Tournaments

This study analyzes the risk-taking behavior of mutual fundsin response to their relative performance over the 1992 to 1999period. Our results show that managers of funds whose performanceis closer to that of the top performing funds have greater incentivesto increase their portfolios' risk than managers at the topwho exhibit a tendency to lock in their positions. The evidencesuggests that termination risk imposes a constraint on the risktaking behavior of underperforming fund managers and the winnertakes all phenomenon generates a strong incentive for the fundmanagers to be the top manager. We also analyze the differencein the risk taking behavior of funds managed by multiple managersand single managers. JEL Classification codes: G2 L2     

Mutual fund liquidity timing ability in the higher moment framework

Using mutual fund data in Thailand, this study shows that fund managers can time the market-wide liquidity in the higher moment framework. High-performing fund managers demonstrate significantly positive liquidity timing ability, while low-performing fund managers do not. Thus, high-performing fund managers increase (decrease) the funds' exposure to the market during a high (low) market liquidity period, while low-performing fund managers do not show the liquidity timing ability. Moreover, only top-performing bank-related mutual funds possess the liquidity timing ability, supporting the information advantage hypothesis. Nonbank-related funds do not possess the liquidity timing ability at both the aggregate and portfolio levels. Several robustness tests confirm the findings.     

Mutual fund performance: Using bespoke benchmarks to disentangle mandates,constraints and skill

While no two mutual funds are alike in terms of their mandates and constraints, metrics used to evaluate fund performance relative to peers typically fail to account for these differences by relying on generic benchmark indices and rankings. We develop a methodology to construct a conditional multi-factor benchmark that explicitly incorporates the details of a given fund’s mandates and constraints. The results suggest that (i) mandates and constraints are economically important and affect funds differently, (ii) in general, the average mutual fund has a much improved track record when comparing themselves to a bespoke benchmark, and (iii) the rank ordering of fund bespoke performance relative peers is significantly different than the original rank ordering suggesting advisors and board of directors would make better decisions regarding compensation and performance assessment respectively, if they incorporate the impact of mandates and constraints.     

On the short-term persistence of mutual fund performance in Europe

In this article, we examine the short-term persistence in mutual fund performance in the main European markets between January 1990 and December 2022. The mutual fund industry in Europe has experienced significant growth in recent years as a consequence of the integration of its markets. However, the European mutual fund industry is still an unexplored area of research with only a small number of significant studies compared to the US industry. Using a sample of daily survivorship bias-free data on the five most important European mutual fund countries, which includes 2734 mutual funds across all countries, we find statistically significant persistence in the post-ranking quarter across different performance models for all countries. This evidence is present across all deciles including the top-decile and bottom-decile mutual funds. Further, we also extend our analysis to high inflation periods.     

Informed trading around earnings and mutual fund alphas

We examine whether informed trading around earnings announcements drives mutual fund performance. The measure is motivated by prior studies arguing that a mutual fund is skilled if it buys stocks with subsequent high earnings announcement returns. We find that this measure predicts future mutual fund returns. On average, after adjusting for Carhart’s four risk factors, the top decile of mutual funds outperforms the bottom decile by 44 basis points per quarter. By decomposing fund alphas into two components in their relations to earnings, we find that this measure is only associated with earnings-related fund alphas. This measure can also be used to predict stock returns at future earnings announcements.     

Blurred stars: Mutual fund ratings in the shadow of conflicts of interest

Using unique data on trading commission payments to mutual fund rating companies (MFRCs) by mutual funds in China, this paper investigates whether the conflicts of interest arising from trading commission payments bias MFRCs’ mutual fund star ratings and hence affect their informativeness. We find the rating of a mutual fund is more optimistic when the MFRC either (i) receives trading commission fees from the mutual fund or (ii) can potentially receive fees in the future. The paper further shows that the usefulness of ratings in terms of predicting a fund’s future performance is negatively impacted by conflicts of interest. There is also evidence that investors can see through the problem, responding less enthusiastically (in terms of fund flows) to the ratings of conflicted MFRCs. We further find that the introduction of a rating qualification system that aims to improve mutual fund rating quality exacerbates the rating bias.     

Daily mutual fund flows and redemption policies

We examine how redemption policies affect daily fund flows in open-end mutual funds. Since short-term trading of fund shares, as manifested in daily fund flows, can have an adverse impact on returns to the fund’s shareholders, mutual funds might find it desirable to discourage short-term trading through the use of redemption fees. However, if daily fund flows are due to fund shareholders’ legitimate liquidity demands, the redemption fee would have little effect on daily fund flows and possibly adversely affect fund shareholders by imposing a liquidity cost on them. We find that the likelihood of a fund charging a redemption fee is largely a function of its overall fee structure. We also use a sample of funds that imposed redemption fees to examine whether the distribution of daily fund flows changes after the initiation of the redemption fee. We find that the redemption fee is an effective tool in controlling the volatility of fund flows.     

Commercial bank mutual fund activities: Implications for bank risk and profitability

This paper examines the risk structure of bank holding companies and the effect of mutual fund activities on bank risk and profitability over the period 1987–1994. Findings from structural change tests indicate a significant decline in bank risk occurred near the mid-point of the study. Results from a confirmatory factor analytic model employed to examine the impact of mutual fund activities on banks suggest that mutual fund activities moderated bank industry systematic risk during the sample period. Mutual fund activities also increased the profitability of banks. These results suggest that mutual funds represent a productive avenue of expansion for bank holding companies.     

The effect of data availability in measuring fund managers’ after‐tax alphas

We examine potential sources of measurement error when evaluating the after‐tax performance of fund managers based on periodic snapshots of their holdings alone, compared with when daily transactions data are also available. To do this, we compare portfolio return estimates based on imputed trades from monthly, quarterly and semi‐annual snapshots with estimates that also incorporate daily trades for a sample of active institutional equity portfolios. This method allows us to directly measure the contribution of interim trading before tax, while more accurately estimating the tax effects associated with turnover through observing actual trade prices. Further, availability of both trade and holdings data permits the identification of how contributions and tax effects arise from income and capital gains sources, as well as how they vary across investment styles and market conditions.     

Dedicated REIT Mutual Fund Flows and REIT Performance

This study examines the effects of weekly and monthly capital flows into the dedicated REIT mutual fund sector on aggregate REIT returns and, simultaneously, the effects of industry-level REIT returns on subsequent REIT mutual fund flows. The dynamic relation between REIT capital flows and returns is estimated using vector autoregression (VAR) techniques. Unlike static regression techniques, our dynamic model produces estimates of the short-run relationships, long-run relationships, impulse response functions, and forecast variance decompositions. We find evidence that REIT mutual fund flows are positively and significantly related to prior returns, while prior REIT mutual fund flows do not significantly influence REIT returns. However, contemporaneous flows do appear to have an initial positive effect, which is partially reversed one period later. The positive contemporaneous effect, however, is the result of unexpected REIT mutual fund flows, while the expected portion is insignificant.     

Payoff complementarities and financial fragility: Evidence from mutual fund outflows

The paper provides empirical evidence that strategic complementarities among investors generate fragility in financial markets. Analyzing mutual fund data, we find that, consistent with a theoretical model, funds with illiquid assets (where complementarities are stronger) exhibit stronger sensitivity of outflows to bad past performance than funds with liquid assets. We also find that this pattern disappears in funds where the shareholder base is composed mostly of large investors. We present further evidence that these results are not attributable to alternative explanations based on the informativeness of past performance or on clientele effects. We analyze the implications for funds’ performance and policies.     

Timing and selectivity in Portuguese mutual fund performance

We extend the international evidence on timing and selectivity skills of fund managers by applying the Henriksson and Merton [Henriksson, R., Merton, R., 1981. On market timing and investment performance. II. Statistical procedures for evaluating forecasting skills. J. Bus. 54, 513–533] model to Portuguese based mutual funds investing in local, European and International equity.

The results show that managers do not exhibit selectivity and timing abilities, and there is even some evidence of negative timing. Furthermore, we observe a distance effect on stock selection performance, since fund managers that invest locally seem to perform better that those who invest in foreign markets. However, this effect is reverted with respect to market timing skills of fund managers, suggesting that International fund managers are more focused in market timing strategies.     

Portfolio concentration and mutual fund performance

Mutual fund managers should choose to increase their portfolio concentration when their information set is valuable enough that the benefits of the expected increase in alpha more than offsets the costs of the expected increase in idiosyncratic volatility. Consistent with that idea, we find that fund performance improves after concentration increases. Because the expected costs of increased concentration vary between funds and over time, the required expected benefits before managers choose to increase concentration should also vary. Among other results, we show that the concentration-performance relation is stronger for funds with less institutional ownership and when investor sentiment is low.     

Decomposing mutual fund alpha into security selection and security weighting

I decompose mutual fund alpha into two components: which stocks a mutual fund selects and what weights are placed in those stocks. Although related, each decision has a distinguishable impact on portfolio alpha. I show that deciding how to weight securities is of greater importance than deciding which securities to select. The ability to generate weighting alpha persisting for 12 months while the ability to generate selecting alpha persists for just one. Finally, the performance of mutual funds that both accurately weight and select securities persists for one month and results in significant outperformance.     

Rating mutual funds: Construction and information content of an investor-cost based rating of Danish mutual funds

We develop a new rating of mutual funds: the atpRating. The atpRating assigns crowns to each individual mutual fund based upon the costs an investor pays when investing in the fund in relation to what it would cost to invest in the fund's peers. Within each investment category, the rating assigns five crowns to funds with the lowest costs and one crown to funds with the highest costs.We investigate the ability of the atpRating to predict the future performance of a fund. We find that an investor who has invested in the funds with the lowest costs within an investment category would have obtained a risk-adjusted excess return that is approximately 3–4 percentage points higher per annum than if the funds with the highest costs had been invested in.We compare the atpRating with the Morningstar Rating. We show that one reason why the atpRating and the Morningstar Rating contain different information is that the returns Morningstar uses as inputs when rating funds are highly volatile whereas the costs the atpRating uses as inputs when rating funds are highly persistent. In other words, a fund that has low costs one year will most likely also have low costs the following year, whereas the return of a fund in a certain year generally contains only little information about the future return that the fund will generate.Finally, we have information on the investments in different mutual funds made by a small subgroup of investors known to have been exposed to both the atpRating and the Morningstar Rating. We find that investors have clear preferences for funds rated high by both the atpRating and the Morningstar Rating.