Finance and Financial Management Commons^™

Is Anti-Herding Always A Smart Choice? Evidence From Mutual Funds, John Byong-Tek Lee, Jun Ma, Dimitris Margaritis, Wanyi Yang

Sim Kee Boon Institute for Financial Economics

Recent empirical studies document a negative relation between herding behaviour and the skill of mutual fund managers. We explore this relationship further by focusing on fund managers' contrarian buy and sell behaviour against the market. Our study reveals an asymmetry in the performance of mutual funds with contrarian buy behaviour and contrarian sell behaviour. The contrarian-buy behaviour reflects skill by positively predicting the cross-section of next period's mutual fund returns, while the contrarian-sell behaviour reflects a lack of skill associated with a negative prediction. These findings are robust to various risk-adjusted performance measures. Contrarian-buy funds outperform momentum-buy funds by 3% …

Air Pollution, Behavioral Bias, And The Disposition Effect In China, Jennifer (Jie) Li, Massimo Massa, Hong Zhang, Jian Zhang

Research Collection Lee Kong Chian School Of Business

Inspired by the recent health science findings that air pollution affects mental health and cognition, we examine whether air pollution can intensify the cognitive bias observed in the financial markets. Based on a proprietary data set obtained from a large Chinese mutual fund family consisting of complete trading information for more than 773,198 ac-counts in 247 cities, we find that air pollution significantly increases investors' disposition effects. Analysis based on two plausible exogenous variations in air quality (the vast dissi-pation of air pollution caused by strong winds and the Huai River policy) supports a causal interpretation. Mood regulation provides a …

The Impact Of Crises On The Shift In Capital Flows From Active To Passive Investment Strategies, Jordan Wang

Honors Scholar Theses

The study investigates the plausibility of an active to passive transition, the impact of crises on the potential transition, and the performance-flow relationship of both active and passive investment products, which includes US equity, open-end and ETF, funds. The analysis compares active and passive funds through the lens of fund flows, absolute returns, and risk-adjusted returns. The study shows that there seemed to be an active to passive transition from 2007 – 2019 and that 2020 – 2021 exhibits measures that could describe changes in the active to passive narrative. A performance-flow relationship exists across both active and passive funds. …

The Role Of Mutual Funds In Corporate Social Responsibility, Zhichuan Li, Saurin Patel, Srikanth Ramani

Business Publications

This paper examines the role of mutual funds in corporate social responsibility (CSR). Using a fund-level, holdings-based CSR score, we find that CSR-friendly mutual funds improve firms’ CSR standings. This effect is more pronounced for firms with higher mutual fund ownership and stronger corporate governance. We further show that while CSR-friendly mutual funds have influence on almost all CSR categories, they focus on increasing CSR strengths rather than reducing CSR concerns. We also discover that CSR-friendly funds are more likely to vote in favor of CSR proposals, and that firms owned by CSR-friendly funds are more likely to link their …

Mutual Fund Trading Costs And Diseconomies Of Scale, Jeffrey Busse, Tarun Chordia, Lei Jiang, Yuehua Tang

Research Collection Lee Kong Chian School Of Business

Larger mutual funds underperform smaller funds even though they have lower percentage transaction costs. Larger funds hold and trade a larger fraction of bigger, more liquid stocks, which leads to lower percentage transaction costs than smaller funds. Smaller funds outperform larger funds primarily when small cap stocks outperform large cap stocks. Overall, we find that it is not trading costs but fund holding characteristics, especially the market capitalization of stock holdings, that drive diseconomies of scale in the mutual fund industry.

Can Investors Benefit From Using Morningstar's Stewardship Grades?, Scott B. Moore, Gary E. Porter

2017 Faculty Bibliography

Interest in governance led Morningstar to develop a summary measure for mutual fund governance. In contrast to previous work in this area, we focus on whether and how individual investors can use the Stewardship Grade Overall to improve mutual fund selection. We find that regardless of fee structure, top overall governance grade funds impose lower costs on investors regardless of fund investment style. We also find some evidence that choosing funds with the highest stewardship grade may earn positive risk adjusted returns. Stewardship Grade overall may therefore help less sophisticated investors identify better-performing mutual funds.

Portfolio Manager Compensation And Mutual Fund Performance, Linlin Ma, Yuehua Tang, Juan-Pedro Gomez

Research Collection Lee Kong Chian School Of Business

We use a novel dataset to study the relation between individual portfolio manager compensation and mutual fund performance. Managers with explicit performance-based pay exhibit superior subsequent fund performance, especially when investment advisors link pay to performance over a longer time period. In contrast, alternative compensation arrangements, such as fixed salary, assets-based pay, or advisor-profits-based pay are not associated with superior performance. Our tests further show that the positive relation between performance-based contracts and fund performance is not driven by the selection of talented managers proxied by education background. Lastly, managers with performance-based pay engage less in risk-shifting activities.

Mutual Funds’ Soft Dollar Arrangements: Determinants, Impact On Shareholder Wealth, And Relation To Governance, Yaman Ö. Erzurumlu, Vladimir Kotomin

Faculty Publications - Finance, Insurance, and Law

Mutual fund advisers either expense the cost of research and other services or pay for them with soft dollars. This study is the first to use actual soft dollar and total brokerage commission figures for a large number of funds and to examine how soft dollars are linked to mutual fund governance. Employing a survivorship bias-free sample of actively managed US mutual funds, we find that higher soft dollar and total brokerage commissions are associated with higher advisory fees but not with higher risk-adjusted fund returns. These findings suggest that mutual fund shareholders, on average, do not benefit from the …

Do Mutual Funds Herd In Industries?, Umut Celiker, Jaideep Chowdhury, Sokhan Sonaer

Business Faculty Publications

This study examines whether mutual funds herd in industries and the extent to which such herding impacts industry valuations. Using two herding measures proposed by Lakonishok et al. (1992) and Sias (2004) we document that mutual funds herd in industries. We show that industry herding is not driven by fund flows and that it is not a manifestation of individual stock herding. We also find evidence indicating that herding in industries by mutual funds is related to the industry momentum phenomenon first documented by Moskowitz and Grinblatt (1999), but it does not drive industry valuations away from their fundamentals.

Investor Behavior In The Mutual Fund Industry: Evidence From Gross Flows, George D. Cashman, Federico Nardari, Daniel N. Deli, Sriram V. Villupuram

Finance Faculty Research and Publications

Using a large sample of monthly gross flows from 1997 to 2003, we uncover several previously undocumented regularities in investor behavior. First, investor purchases and sales produce fund-level gross flows that are highly persistent. Persistence in fund flows dominates performance as a predictor of future fund flows. More importantly, failing to account for flow persistence leads to incorrect inferences with respect to the relation between performance and flows. Second, we document that investors react differently to performance depending on the type of fund, and that investor trading activity produces meaningful differences in the persistence of fund flows across mutual fund …

Who Calls The Shots?: How Mutual Funds Vote On Director Elections, Stephen J. Choi, Jill E. Fisch, Marcel Kahan

All Faculty Scholarship

Shareholder voting has become an increasingly important focus of corporate governance, and mutual funds control a substantial percentage of shareholder voting power. The manner in which mutual funds exercise that power, however, is poorly understood. In particular, because neither mutual funds nor their advisors are beneficial owners of their portfolio holdings, there is concern that mutual fund voting may be uninformed or tainted by conflicts of interest. These concerns, if true, hamper the potential effectiveness of regulatory reforms such as proxy access and say on pay. This article analyzes mutual fund voting decisions in uncontested director elections. We find that …

Convenience In The Mutual Fund Industry, George D. Cashman

Finance Faculty Research and Publications

Abstract

I examine the role of convenience in the mutual fund industry. I find that investors pay more for relatively convenient funds, and that the flows to convenient funds are less responsive to performance. These findings suggest that investors do not evaluate mutual funds independently, but rather that investors select a primary fund, likely based on beliefs about managerial ability, and then select funds which are relatively convenient to this primary fund.

Highlights

► I find that investors pay a significant premium to invest in convenient mutual funds. ► I find that the flows to convenient funds are indifferent to …

Mutual Fund Industry Selection And Persistence, Jeffrey A. Busse, Qing Tong

Research Collection Lee Kong Chian School Of Business

We analyze mutual fund industry selectivity — the performance of a fund’s industry allocation relative to the market. We find that industry selection accounts for a full third of fund performance based on two-digit SIC codes, with the remaining attributable to the performance of individual stocks relative to their own industries. We find that industry-selection skill drives persistence in relative performance, particularly over longer investment horizons. Unlike individual-stock-selection ability, industry selectivity is not eroded by increasing fund assets. Our results suggest that accounting for a manager’s ability to pick outperforming industries provides information beyond standard performance measures that can enhance …

A Floating Nav For Money Market Funds: Fix Or Fantasy?, Jill E. Fisch, Eric D. Roiter

All Faculty Scholarship

The announcement by the Reserve Primary Fund, in September 2008, that it was “breaking the buck,” triggered a widespread withdrawal of assets from other money market funds and led the U.S. Government to adopt emergency measures to maintain the stability of the short term credit markets. In light of these events, the SEC heightened the regulatory requirements to which money market funds – a three trillion dollar industry -- are subject. Regulators and commentators continue to press for further regulatory change, however. The most controversial reform proposal would eliminate the ability of money market funds to purchase and sell shares …

Off The Rack Versus Savile Row: The Value Of Custom Tailoring For Equity Investors, Steven D. Dolvin, John Gonas

Scholarship and Professional Work - Business

eparately managed accounts (SMAs) generally carry a higher fee structure than standard mutual funds, but managers tout the ability to customize accounts as being worthy of this higher cost. This customization may increase returns, or it may simply allow for more personalized tax management or control over other unique circumstances. • Very little research exists on the relative return benefit of SMAs compared with actively managed mutual funds. We fill this gap by examining firms that offer concurrently managed funds-SMAs as well as matching mutual funds run by the same manager(s) and following the same general strategy. • We find …

Pay-Performance Sensitivity And Firm Size: Insights From The Mutual Fund Industry, George D. Cashman

Finance Faculty Research and Publications

I examine the ex ante decision to make an agent's pay-performance sensitivity an inverse function of organization size. I focus on mutual funds and their decision to use compensation contracts that reduce the advisor's marginal compensation as the fund grows (a declining-rate contract) over the dominant contract type, where marginal compensation is unrelated to fund size (a single-rate contract). I find evidence consistent with the view that declining-rate contracts are a mechanism to keep marginal compensation in line with the advisor's declining marginal product. Specifically, I find that funds with greater exposure to diseconomies of scale are more likely to …

Real Estate Mutual Funds: A Style Analysis, Crystal Lin, Kenneth Yung

Finance Faculty Publications

We find that the characteristics of real estate related securities are different from those of the general common equities. To help investors understand better the products offered by real estate mutual funds, we develop style descriptors that are specifically created for real estate related securities. Among the universe of real estate securities, we find real estate funds tilt toward large stocks and favor growth moderately over value. Growth managers outperform value mangers in this sector by 1.51% to 2.30% per year. However, there is evidence of shifts in the investment style among the funds. Our results help investors in evaluating …

Style Effects In The Cross-Section Of Stock Returns, Melvyn Teo, Sung-Jun Woo

Research Collection Lee Kong Chian School Of Business

Using CRSP stock and mutual fund data, we find strong evidence for reversals at the style level (e.g., large value, small growth, etc.). There are significant excess and risk-adjusted returns for stocks in styles characterized by the worst past returns and net inflows. We also find evidence for momentum and positive feedback trading at the style level. These value and momentum effects are driven neither by fundamental risk nor by stock-level reversals and momentum. Taken together, the results are consistent with the style-level positive feedback trading model of Barberis and Shleifer (2003).

Persistence In Style-Adjusted Mutual Fund Returns, Melvyn Teo, Sung-Jun Woo

Research Collection Lee Kong Chian School Of Business

The literature on mutual fund persistence took a hit with the finding that one-year stock momentum and expense ratios account for most of the persistence in mutual fund performance (Carhart, 1992; Carhart, 1997). However, since equity mutual funds are grouped into styles (e.g., large value, small growth, mid-cap growth, etc.) and are often confined to trading stocks within their style, one should measure fund performance relative to style when investigating managerial ability. Using CRSP mutual fund data and a methodology similar to Carhart (1997), we find that differences in style-adjusted fund returns persist for up to six years. Neither one-year …

An Analysis Of The Cross Section Of Returns For Ereits Using A Varying-Risk Beta Model, C. Mitchell Conover, H. Swint Friday, Shelly W. Howton

Finance Faculty Publications

A dual-beta asset pricing model is employed to examine the cross-section of realized equity real estate investment trust (EREIT) returns over bull and bear markets. No significant relationship is found between EREIT returns and a constant beta. However, beta explains cross-sectional returns when betas are allowed to vary across bull markets. This positive relationship exists for both January and non-January months. During bear-market months, no significant relationship is found between REIT betas and returns. But, during such months, size and book-to-market ratio are found to be negatively related to returns.