Fund Portfolio Research Articles

DEVELOPMENT OF THE INDUSTRIAL INVESTMENT FUND FOR THE LOCAL GOVERNMENT IN CHINA

The purpose of this study is to examine the development of the industrial investment fund for the local government in China. This study constitutes a quantitative study. Based on a model framework, the existing literature and previous studies on the regulatory mechanism, market exit mechanism, professionals, lack of risk prevention, single fund portfolio are independent variables. The policy is an intermediate variable, and sustainable promotion of industrial investment fund development is a non-independent variable. Findings show that there is a relationship between Industrial investment fund for the local government in Henan, China and Development of the industrial investment fund for the local Government in Henan, China. This study has also revealed that higher the perceived supervision system structure and market exit mechanism of industrial investment fund for the local government in Henan, China, policy Industrial investment fund for the local government in Henan, China becomes higher. Industrial investment fund for the local government in Henan, China providers and industrial investment fund for the local government in Henan, China business developers will have to realize the importance of knowing and understanding policy perception on industrial investment fund for the local government in Henan, China as is vital in inducing policy.
 
 <p> </p><p><strong> Article visualizations:</strong></p><p><img src="/-counters-/edu_01/07780/a.php" alt="Hit counter" /></p>

Fee Complexity and Investor Mistakes in Retail Financial Markets

Mutual funds sold via brokers offer fund portfolios that investors can purchase in one of three classes: A, B or C. These classes are distinguished only by their fee schedules and thus have different net performance results. An analysis of relative class performances for a set of U.S. mutual funds between 1992 and 2008 reveals a striking fact about class B: while classes A and C provide the best performance results at long and short holding periods, respectively, class B is dominated by either class A or C at any holding period. The inferiority yet popularity of class B at first suggests that naïve investors who do not understand the fee schedule of this class are being exploited. However, I propose two hypothetical clienteles which might rationally demand class B shares: one (a) with uncertain holding periods, or one (b) that desires to have long holding periods but is unable to commit to them. I identify whether investors rationally or naïvely purchase class B by examining the flow-fee sensitivity and estimating investor holding periods. My results support the naïve investor explanation.

Portfolios of Actively Managed Mutual Funds

Investors should focus on the performance of portfolios of active funds, not on the performance of individual active funds. Taking this portfolio approach with respect to active U.S. equity mutual funds, I build an optimized portfolio of funds that subsequently has low idiosyncratic volatility and a large, positive, statistically significant alpha. Consistent with a Berk and Green (2004) equilibrium, that outperformance is short lived if the optimized portfolio is not rebalanced often, as investors allocate substantial capital—in excess of that expected based on past performance—to the funds with a large weight in the optimized portfolio.

Managing Mutual Fund Portfolio—the Franklin Templeton Credit Risk Fund Debacle

Franklin Templeton started its Indian operations in the year 1996. On 24th April 2020 it made an announcement that it would be winding up Franklin India Credit Risk Fund and five other funds. This case is about the debacle of Franklin India Credit Risk Fund. Liquidity crisis in the debt market due to various events that happened in 2019, exposure towards debt instruments that turned risky (such as Yes Bank and Vodafone), reduction of inflows, redemption pressure, debt market becoming illiquid due to COVID-19 pandemic, were cited as some of the reasons for winding up of Franklin India Credit Risk Fund. The important thing to note is that when other credit risk funds have not taken the decision of winding up, why Franklin India Credit Risk Fund took this call? This case presents an opportunity to the students to analyse the factors that have contributed to the debacle and whether the decision taken is correct?

Cash management and performance of index mutual funds

ObjetivoEl objetivo de este estudio es analizar la relación existente entre la gestión de efectivo y el desempeño consiguiente en las carteras de fondos de inversión indexados.Diseño/metodología/perspectivaUtilizando una muestra de 104 fondos que replican el índice bursátil Standard and Poor's 500 desde enero de 1999 hasta diciembre de 2016, se emplean carteras hipotéticas que invierten en fondos similares y diferentes análisis de regresión para analizar las diferencias en las rentabilidades ajustadas mensuales entre fondos indexados que gestionan diferentes niveles de efectivo en sus carteras. Por motivos de robustez, se tienen en cuenta diversos subperiodos y estados de mercado, así como otros factores exógenos y características de los fondos que afectan tanto al nivel de efectivo mantenido en la cartera indexada como al desempeño de la misma.ResultadosLos resultados muestran que los fondos indexados que gestionan niveles de efectivo más elevados experimentan un desempeño significativamente menor que otros fondos comparables que mantienen menores porcentajes de efectivo en sus carteras de inversión. Se obtiene una evidencia similar tras considerar diferentes subperiodos y momentos alcistas y bajistas de mercado, así como al considerar los gastos propios de cada fondo y otras variables que podrían afectar esta relación entre el rendimiento y el efectivo gestionado.Originalidad/contribuciónEste estudio contribuye a la literatura existente que analiza la gestión de efectivo en la industria de fondos de inversión. Más específicamente, los análisis se centran en carteras de fondos que replican un índice bursátil específico, dado que las diferencias en sus rendimientos en este tipo de fondos no deberían originarse por la evolución del mercado, sino a causa de factores relacionados con la gestión de sus carteras y otros componentes exógenos al índice bursátil. Estos hallazgos son de interés para gestores e inversores que pretendan mejorar sus rentabilidades ajustadas al invertir mediante una estrategia tan diversificada como un índice bursátil.

Are Investors Aware of Climate-Related Transition Risks? Evidence from Mutual Fund Flows

Using information on climate transition risks embedded in US equity mutual fund portfolios, we report evidence that mutual fund investors consider climate-related transition risk to be an undesirable fund feature and accordingly allocate more money to funds with lower climate-related transition risk. The size of the impact of this risk on fund flows differs depending on the performance expectations of investors, the socially responsible focus and the sustainability of the fund. Our results suggest that mutual fund investors are aware of climate-related transition risks as evidenced by their investment decisions.

Replicas: Have Hedge Funds Re-Resurrected as Traditional Beta?

We find market risk factors explain up to 81% of North American and Asian hedge fund portfolios’ variance, while out-of-sample clones have up to 98% correlation with realized returns. So-called “market neutral” funds take on significant short-term market bets, where rolling beta clones display up to 74% correlation with realized returns. Overall, returns attributable to skill declined systematically, with clones outperforming hedge fund indices. In our novel event study, we demonstrate clones are resilient to drawdowns, outperforming the market during China's COVID-19 lockdown and the WHO's pandemic announcement; 10-day market-adjusted CARs ranged from 2.46% – 9.71% for these dates.

Capital flows under global uncertainties: Evidence from Turkey

This paper investigates the effects of global economic uncertainty and trade policy–related uncertainty in the US in predicting the bond and equity flows to Turkey during the period from January 2008 to November 2019. We use the time-varying Granger-causality test to assess the ability of economic policy uncertainty and capital flows to forecast Turkish equity and bond markets using fund-level data on bond and equity inflows compiled by the Emerging Portfolio Fund Research (EPFR) global database. Although we found no evidence of causality in the standard Granger-causality test, the time-varying robust causality test detects significant episodes that imply a causal relationship between capital flows and uncertainty indexes, especially during the global financial crisis and the election of the Trump administration.

Dynamic Indexing and Allocation: Do they Dominate Simple Static Indexing?

Andrew Lo in his book, Adaptive Markets, advocates an investment product that he names a “dynamic index.” He has facilitated the operation of a variant of this dynamic indexation, “dynamic allocation,” by founding a company, AlphaSimplex. Another dynamic investment is GMO’s Benchmark Free Allocation fund. We assess the role for dynamic investing with the AlphaSimplex funds and the GMO fund. The dynamic funds have higher expense ratios and turnover than static index funds do. Do the strategies of these funds add value, and if so is dynamic investing magical enough to overcome these hurdles? Do dynamic investments dominate a simple portfolio of static index funds with similar style rebalanced regularly whether risk adjusted or not and with or without differential expenses stripped away? We also clarify the interpretation of the Fama-French multi-factor models, generalize them, and discover the equivalence between the Fama-French and Sharpe (1992) approaches to mutual fund assessment. On average AphaSimplex funds underreturn portfolios of Vanguard index funds with the same style by 2.54 % age points per year. Some of that is because of expense ratios. Gross of expense ratios the average underreturn is 1.51 % age points/year.

Determinants of return rates of Russian equity and bond mutual funds: Active investment strategies and commissions

In our paper, we study the impact of active investment strategies and factors of their success in the Russian market of collective investment — self-confidence of managers, commissions of management companies (MC) — on return rates of mutual funds. For the first time, not only equity mutual funds, but also bond mutual funds are considered as an object of study; the time period is since 2012. Our study is based on data on the structure of mutual fund portfolios provided by Investfunds. We propose a number of original indicators of an active management style and consider the profitability of mutual funds relative to various benchmarks. Based on testing of multivariate regression models, it has been revealed that the return rate of equity mutual funds is negatively affected by a share of stocks in the fund portfolio which are not included in the market index. When managers take into account their previous negative investment experience, it contributes to the growth of mutual fund return rates. Active investment strategies correlate with increased commissions (up to 4.5% of NAV), but they do not allow an investor to receive higher return rates than index investments. An increase in the share of corporate bonds allows the fund manager to outperform benchmarks for bond funds. For the first time, a nonlinear relationship between the size of mutual funds and the value of commissions has been revealed for the Russian market.

Diversification Within Large Cap Equity Mutual Funds in India

We ask whether a portfolio of large-cap mutual funds in India generates any diversification benefits as compared to holding a single large-cap index tracking exchange-traded fund. Using a mix of traditional measures like correlation and covariance of excess returns, and measures like tracking error, information ratio, and active share, we show that there are limited diversification benefits in a portfolio of two or more large-cap funds. A majority of the funds have similar risk return characteristics and negative information ratios versus a NIFTY100 tracking ETF. A cross-sectional analysis of active shares of the funds at the end of June 2020 shows that underlying holdings of funds are crowded together and funds do not have significant active share.

Active Sector Funds and Fund Manager Skill

The authors investigate the performance of active sector funds whose potential outperformance has not been exhausted entirely by decreasing returns to scale. The authors document that despite good track records, most sector funds are relatively smaller than their equilibrium fund sizes, at which they are expected to generate zero net alphas. In particular, from 1998 to 2016, a passive indexation strategy of actively managed sector funds earns an annual benchmark-adjusted return of 5.70% and a monthly alpha of 27 bps. Moreover, the strategy’s outperformance is present in market downturns (i.e., resilient to tail risk) and robust to change of rebalancing frequency and inclusion of expenses. Efficient diversification and underappreciated skill, illustrated by an alpha-arithmetic to guide similar strategies, explain the strategy’s success. TOPICS:Manager selection, mutual fund performance, exchange-traded funds and applications Key Findings • Using data on active equity sector mutual funds, the authors find that an equal-weighted portfolio of sector funds delivers reliable alpha that is resilient to market downturns and only requires infrequent rebalancing. • Active sector funds individually show only weak evidence of selection skill, which may make them somewhat undersized, but an equal-weighted portfolio of them brings out the skill signal and diversifies away much of the alpha-seeking noise. • A portfolio of sector funds benefits from two layers of diversification: It not only washes off the sector-specific risk, it also diversifies the manager-specific active risk because managers in different sectors often make independent active bets.

Private Portfolio Attribution Analysis

There are many methods for conducting performance attribution with portfolios containing only liquid assets. Efforts to conduct similar types of attribution analyses for portfolios of private equity funds (and other illiquid investments) have been thwarted by a lack of periodic asset return data and a clear definition of what constitutes an appropriate market benchmark. We propose a method for decomposing private fund portfolio performance into effects from timing, strategy selection, geographic focus, sizing of fund allocation, and fund selection attributes. We test the method with a simulation study and derive approximate confidence intervals for assessing attribute selection skill using a large historical dataset of buyout and venture capital funds.

Passive Investing and Corporate Governance: A Law and Economics Analysis

An important debate in corporate governance is whether passive funds — a term that includes ETFs and index funds — have incentives to provide adequate oversight of their portfolio companies. One set of scholars contends that agency cost problems likely thwart passive fund stewardship for several reasons. First, passive funds suffer from an acute collective action problem because any investment in improving the performance of a company will benefit all funds that track the index equally, while only the activist fund will incur the costs. Indeed, these scholars point out that investments in stewardship are particularly costly for the passive fund portfolio manager, which lacks the firm-specific information necessary to participate in governance in a beneficial way. Second, passive fund portfolio managers may have inadequate incentives to invest in beneficial stewardship because they capture only a small fraction of the gains. And third and finally, passive fund portfolio managers have ample incentive to be excessively deferential to management, who are often their clients. These scholars conclude that because of these flawed incentives, the rise of passive investing portends economic harm and justifies wide-ranging regulatory intervention — from incentivizing passive fund stewardship, to restricting passive fund voting rights. Another set of scholars contend that passive fund stewardship is likely to be as good as, if not better than, stewardship by other investors. They contend that passive funds compete for investor dollars not just against other passive funds, but also against actively managed mutual funds. This competition provides an incentive for passive funds to invest in stewardship that will attract asset inflows. In addition, the large size of the institutional investors that offer passive funds affords them economies of scale and scope in stewardship. And because these large institutional investors have massive stakes in portfolio companies, capturing even a small fraction of any gain will substantially increase their take home pay, providing an incentive to be engaged for a small number of material votes that occur each year. These scholars contend — in the words of Adam Smith, and later, Jack Bogle — that the invisible hand is all that is needed. This is a chapter from the forthcoming Encyclopedia of Law and Economics (Adam Badawi, ed., 2nd edition 2020).

Adequacy of Islamic Banks and Financial Stability

Since their inception, Islamic banks adhered to capital adequacy requirements promulgated by the Basel accord. Despite the profit and loss sharing and shariah compliance feature of Islamic banks, their technical operations in managing capital adequacy are not very much different from conventional banks in terms of provisioning for Tier 1 and Tier 2 capital. This study aims at highlighting the capital requirements for Islamic banks as delineated by the Basel accord and Islamic financial services Board (IFSB), adopting a comparative approach. It also aims at highlighting the impact of capital adequacy ratios on the financial stability, allowing Islamic banks to undertake their intermediary function at normal or stress situations. The study analyzed IFSB’s outlook on 20 Muslim countries and their capital adequacy ratios as per 2018 Financial stability Report. The research observed that IFSB’s statistics on Capital adequacy are clear indications on the positive impact on a number of variables. This would include liquidity, rise of Islamic banking assets, increased profitability, decline of non-performing financing portfolios, and an effective risk management especially those related to mudarabah and musharakah and displaced commercial risk (DCR). The analysis of IFSB’s statistics have led this research to conclude that capital adequacy ratios of Islamic banks contribute towards the overall financial stability. Besides, IFSB standard on capital adequacy may improve the performance of Islamic banks if the risk-weighted ratios for Islamic financial products are implemented as proposed in the standard. It was finally concluded that the Gulf states focused more on equity based sukuk compared to Malaysia that focused on debt based sukuk to meet Tier 2 capital.

Diversification and Fund Performance—An Analysis of Buyout Funds

This paper studies the relationship between portfolio diversification and fund performance, based on an unexplored, hand-collected dataset of buyout funds. The dataset comprises detailed information at the level of portfolio companies, which allows measuring the concentration of the fund portfolios towards individual companies, industrial, and geographical focus. Our results suggest that diversification within, but not across industries, associates with higher buyout fund performance. We do not find a significant relationship between geographical diversification and performance. These results partly contradict results documented in prior literature.

International Portfolio Choice with Frictions: Evidence from Mutual Funds

Using data on international equity portfolio allocations of US mutual funds, we estimate a simple portfolio expression derived from a standard Markowitz mean-variance portfolio model extended with portfolio frictions. The optimal portfolio depends on two benchmark portfolios, the previous month and the buy-and-hold portfolio shares, and a present discounted value of expected future excess returns. We show that equity return differentials are predictable and use the expected return differentials in the mutual fund portfolio regressions. The estimated reduced form parameters are related to the structural model parameters. The estimates imply significant portfolio frictions and a modest rate of risk-aversion. While mutual fund portfolios respond significantly to expected returns, portfolio frictions lead to a weaker and more gradual portfolio response to changes in expected returns. We also document heterogeneity across funds. Global and larger funds face bigger portfolio frictions, while more active funds give relatively less weight to the buy-and- hold portfolio (rebalance more aggressively).

Behavioral portfolio insurance strategies

Portfolio insurance strategies that ensure a certain minimum portfolio value or floor such as the Constant Proportion Portfolio Insurance (CPPI) and the Option-based Portfolio Insurance are economically important and widely spread among the banking and insurance industries. In distress and volatile market environments, investors such as pension funds have a need to insure their portfolios against downside risk in order to meet certain future payments or liabilities. Non-anticipated shocks or negative interest rates, jumps, crashes, or overnight trading restrictions in stock prices could drop pension fund portfolios below desired levels (present value of pension obligations) making them underfunded with pension assets to pension liabilities ratio below 100%. In particular, within the current low interest rate environment, a high number of pension funds happen to be underfunded which is a severe practical problem. Because of such scenarios, there is a need for an investment strategy which covers both the case of funded and underfunded portfolios. This article introduces a novel strategy which generalizes the CPPI approach. It has the overall target of guaranteeing the investment goal or floor while participating in the performance of the assets and limiting the downside risk of the portfolio at the same time. We show that the strategy accounts for behavioral aspects of the investor such as distorted probabilities, a risk-averse behavior for gains, and a risk-seeking behavior for losses. The proposed strategy turns out to be optimal within the Cumulative Prospect Theory framework by Tversky and Kahneman (J Risk Uncertain 5(4):297–323, 1992).

Can Alumni Relations between Fund Managers and Companies’ Management Exacerbate the Stock Price Volatility?

The private information trading between fund managers and listed companies’ executives based on alumni relations may avoid fair disclosure principal and aggravate stock price volatility. In the capital market, alumni relations have been reduced to a profit-making tool for some fund managers. Therefore, it is of great practical significance to systematically analyze and discuss how alumni relations affect information disclosure and stock price fluctuations of listed companies. This paper systematically examines the adverse impact of the alumni relations between fund managers and listed companies’ executives on information disclosure and stock price stability in the capital market. Taking the quarterly data of China Open-end Fund Portfolio from 2003 to 2016 as the research sample, this paper finds that private information trading between fund managers and listed companies’ executives based on alumni relations would increase the information gap between different investors and exacerbate stock price volatility. Further analysis finds that the existence of alumni relations would lead to short-termism of fund managers. For example, the holding period would be much shorter, the turnover rate would be much higher and professional investors without alumni relations would be crowded out. These results show that the alumni relations between fund managers and listed companies’ executives would adversely affect the stability of the capital market. This paper also finds that private information trading between fund managers and listed companies’ executives based on alumni relations is mainly reflected in the trading of good news. Taking listed companies’ earnings announcement as a shock, we find that fund managers would significantly change their shareholding position before listed companies’ announcement of financial reports. If the profit of this year is bigger than the previous year （good news）, then fund managers would increase their holding of the stock. Further analysis indicates that the significant impact of alumni relations on private information trading and stock price fluctuations is only established in the sub-sample of good news. The above results show that the private information trading between fund managers and listed companies’ executives based on alumni relations is mainly reflected in the trading of good news, which also leads to particularly violent price fluctuations in these stocks. This paper indicates that if we cannot eliminate the influence of private information trading between fund managers and listed companies’ executives based on alumni relations, we cannot guarantee the effective implementation of fair information disclosure. These findings may provide some enlightening significance for the supervision work of the CSRC and related government agencies.

Political Partisan Bias in Mutual Fund Portfolios

We document that fund managers are more likely to allocate assets to firms managed by executives and directors with whom they share a similar political partisan affiliation. We find that this bias is not associated with improved fund performance. Funds with more partisan bias suffer from higher levels of idiosyncratic volatility than those with less bias. Partisan bias is more evident when fund managers are less experienced, in more informationally opaque firms, and when the U.S. president comes from fund managers’ own party. These findings suggest that political partisan bias among fund managers may be due to in-group favoritism.