Fund Portfolio Research Articles

Valuation Risk in Mutual Fund Portfolio Disclosure

Abstract Valuation risk of a security—uncertainty about its fair value—is a subject of considerable concern in the mutual fund industry. If funds report different values for identical securities, investors cannot easily compare their performance. Yet it is not unusual to see identical illiquid stocks, small-cap stocks, stocks with high analyst dispersion, stocks with less analyst coverage, and newly listed stocks valued differently across mutual funds. An equity fund that has positive price dispersion in its portfolio holdings, that performs poorly, that belongs to a fund family with an inclination for aggressive reporting, that holds more stocks subject to stale prices, that holds more pre-IPO firms, or that experiences net outflows will tend to show positive price dispersion again in the next quarter. This behavior is significant in a volatile market. Aggressive reporting helps funds gain in the mutual fund tournament. (JEL G10, G23)

Performance Comparison of Mutual Funds and Sharia Mutual Funds

Abstract Purpose: This study aimed to examine the differences in the performance of Islamic mutual funds with mutual funds based on the Sharpe and Jensen method for the 2010-2020 period in the Indonesian Capital Market. Research Methodology: The study uses a quantitative approach to the type of comparative research. The data used is secondary data from OJK. The population used in this study is the capitalization of sharia mutual fund performance data with mutual funds, the period 2010-2020 (monthly data) in the Indonesian Capital Market. Data analysis was carried out using the Sharpe and Jensen method and the Manova test with the help of the SPSS statistical program. Results: The results of this study indicate that there is no significant difference between the performance of Islamic mutual funds and mutual funds with the Sharpe and Jensen method. This shows that the return on the performance of Islamic mutual funds and mutual funds based on the Sharpe and Jensen method received will be relatively the same. Investment performance in Mutual Fund portfolio management is reflected in the net asset value (NAV). Limitations: This research has been attempted and carried out in accordance with scientific procedures. However, it still has limitations; this research is limited to 2010 – 2020 with monthly data. Contribution: This research implies that this research can better contribute to the general public, academics, and investors to understand the performance of capital market investment instruments before they invest.

Does sectoral diversification of loans and financing improve bank returns and risk in dual-banking systems?

This paper investigates the effects of sectoral diversification of loans and financing on the risk and the returns of banks in dual-banking systems. We employ the system GMM estimator on a unique panel data of 46 Islamic and 60 conventional banks from six countries over the period 2000–2015. Our findings reveal that sectoral diversification of loans and financing reduces the returns and increases the risk of both Islamic and conventional banks; the impact of sectoral diversification on returns varies across risk levels, with negative effects at low- and no effect at moderate- and high-risk levels; the difference between the impacts on Islamic and conventional banks across risk levels are marginal, and the adverse effects of sectoral diversification were exacerbated during the 2008 financial crisis. Expansion of loan and financing portfolios into new sectors has no impact on bank returns and risk in our sample. The findings may provide valuable implications for all stakeholders, regulators, and policymakers.

Cryptocurrencies as Pension Fund Components: Smart Move or Drinking the Kool-Aid?

This study investigates whether cryptocurrencies can be considered a viable addition to pension funds. Using the regulatory setting of Switzerland, it is assessed whether adding crypto-components to a standard pension fund portfolio has positive effects on the fund’s risk and return figures. The empirical data supports the notion that cryptocurrency components may well increase the yield of a pension fund portfolio, yet this enhancement of yield comes at slightly higher risk levels. This increase in risk can be mitigated by adding an actively managed crypto-component to the portfolio rather than a passive investment product. The paper contributes to the ongoing debate in the area of financial innovations on the purpose and solidity of cryptocurrencies as an asset class.

Private Portfolio Attribution Analysis

There are many methods for conducting performance attribution with portfolios containing only liquid assets. A lack of periodic asset return data and a clear definition of what constitutes an appropriate market benchmark thwarts efforts to perform similar types of attribution analyses for portfolios of private equity funds (and other illiquid investments). In this article, the authors 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. They 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. <b>Key Findings</b> ▪ The method provided for evaluating the value created from decisions about the timing, size, geography, and asset class of private fund commitments in this article also provides a residual component. Analysts and investors can interpret this component as value-added by fund selection. ▪ The method provides intuitive estimates in terms of contributions to return multiples (MOICs) and IRRs. ▪ The authors conduct a simulation study using a large sample of private equity buyout and venture capital funds to estimate approximate confidence intervals for each allocation characteristic. Practitioners can use these intervals to statistically separate skill from luck.

Consequences of the Australian Prudential Regulatory Authority’s Investment Performance Tests

The Australian Prudential Regulatory Authority (APRA) has introduced for MySuper products a publicly available comparison of investment performance over three-year rolling periods and will be introducing a similar longer-term comparison under the Your Future Your Super Performance Test. The investment performance will be compared to a reference portfolio. This paper considers the effect of holding illiquid assets and “active” investment management as part of a superannuation fund portfolio and concludes the APRA tests may have undesirable consequences for superannuation fund members.

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 and the socially responsible focus and sustainability of the fund. Our results suggest that mutual fund investors are aware of climate-related transition risks as evidenced by their investment decisions.

RISK OF RETURN CHARACTERISTICS OF ISLAMIC BANK FINANCING PORTFOLIO IN INDONESIA

The study aims to investigate the risk of return characteristics of Islamic bank financing portfolios. A quantitative approach of value at risk is used to estimate return volatility of Islamic commercial banks and Islamic business units in Indonesia for the period of May 2014 to June 2020. The finding suggests proportion of equity-based financing tends to increase in contrast to decreasing of debt and lease-based financing. While rate of return for all financing types tends to decline, the return of equity-based financing experiences higher volatility than other two financing types. The main finding regarding the decrease in value at risk indicates Islamic banks able to reduce risk of financing portfolio. The finding implies Islamic banks should continue to improve the best-practice of risk management based on their past experience to anticipate future risk. As for the regulators, the finding may be used to develop early warning system to anticipate a systemic failure in Islamic banking industry. Further research is recommended to explore impact of market behavior on the risk of each type of financing.

Portfolio Analysis Using the Single Index Method in the COVID-19 Pandemic Period

The COVID-19 outbreak that occurred in early 2020 put pressure on economic activity in many countries, including Indonesia. The pressure on economic activity can be seen from the index movement in the capital market. The JCI as a composite index that reflects transaction activity in the Indonesian capital market has weakened due to the impact of the COVID-19 outbreak in a number of business sectors. The decline in the index is a warning for investors to rearrange the composition of assets in their portfolios so that returns can remain optimal during a pandemic. The single index model (SIM) can be used by investors to make investment decisions, including to rearrange their investment portfolios. The share price data analyzed covers the period from 2 September 2019 to 7 December 2020, where the government confirmed the first positive case of COVID-19 in Indonesia on 3 March 2020. The Single Index Model is used to select assets to form an optimal portfolio. Portfolio performance is measured using the Sharpe, Treynor and Jensen index. The sector rotation strategy results in five selected sectors whose assets will be selected to form an optimal portfolio, namely the consumption sector (JKCONS), the basic and chemical industry sector (JKBIND), the infrastructure sector (JKINFA), the mining sector (JKMING) and the financial sector (JKFINA). The listed companies for analysis were 25 out of 184 issuers in the five sectors. The Single Index Model selects 3 issuers for the pre-COVID period and 10 issuers for the COVID period. The allocation of portfolio funds for the pre-COVID period showed BTPS of 44.94%; CPIN 47.61% and BYAN 7.46%. 2.8% allocation of portfolio funds during the COVID period to BTPS issuers; PBID 22.57%; TKIM 15.96%; BYAN 5.86%; ITMG 17.89%; MYOH 1.56%; PTBA 1.76%; ADRO 12.54% and PPRE 19.05%. The portfolio's expected return is positive, which means that the portfolio formed has the potential to generate profits. The Sharpe, Treynor and Jensen indexes are positive, which means that portfolios formed using a single index model have the potential to have good performance. Keywords: investors, IHSG, portfolio performance, single index model, optimal portfolio.

Practical Applications of Mutual Fund Returns and Their Characteristics:A Simple Approach to Selecting Better-Performing Actively Managed Funds

In <b>Mutual Fund Returns and their Characteristics: <i>A Simple Approach to Selecting Better-Performing Actively Managed Funds</i></b>, from the April 2020 edition of <b><i>The Journal of Investing</i></b>, <b>Burton G. Malkiel</b> of <b>Princeton University</b> and <b>Atanu Saha</b> of <b>Econ One Research</b> discuss which mutual-fund attributes best predict future fund returns. The authors find that fund selection guided by a combination of characteristics—low turnover rates, low expense ratios, and high Sharpe ratios—can lead to portfolios that considerably outperform the average actively managed fund. The authors use a robust dataset comprising prices on US and international equity funds from 2000 to 2018. They investigate the persistence of fund attributes—fund <i>age</i>, <i>size</i>, <i>net asset flows</i>, <i>prior-year</i><i>returns</i>, <i>turnover rates</i>, <i>Sharpe ratios</i> and <i>expense ratios</i>—in auguring future returns, both year-over-year and longer term. While verifying that expense ratios are significant predictors of a fund’s future returns, they stress that Sharpe ratios and turnover rates are even more predictive. Investors are encouraged to apply all three traits together to build better-performing fund portfolios. Moreover, these cost and risk-control characteristics persist enough to enable investors to dependably detect funds with extended, and statistically significant, above-average returns. <b>TOPICS:</b>Portfolio theory, portfolio construction, style investing

Institutional investors’ sustainability policies and the outcomes for the healthcare sector portfolios

The article reviews policies with respect to responsible investment in health as well as actual portfolio holdings in drug development firms by five large public pension funds in the US, Japan, Norway, the Netherlands and Canada. In spite of commitment to “sustainable corporate value”, no discernible tilt towards companies conducting research in the areas of high disease burden and unmet medical need is observed. Rather investments very closely track the size (market capitalisation) of the portfolio firms. A representative drug development company in portfolios of large public pension funds is constructed by taking a weighted average of product track records of individual companies included in those portfolios. The weights are based on the share of the fund's portfolio allocated to individual companies. According to this calculation, only 1 in 10 new medicines brought to the market by a representative drug development company makes a substantial contribution to illnesses they target compared to the existing treatments. Nevertheless, developing and sharing best practices for sustainable investment is a relatively new agenda pursued by large public and quasi-public asset owners worldwide, which presents an opportunity for the medical research community to contribute to meaningful guidelines for responsible evidence-based investment into commercial medical research.

RISK-RETURN PERFORMANCES OF REAL ESTATE INVESTMENT FUNDS IN TURKEY INCLUDING THE COVID-19 PERIOD

The purpose of this research is to give an insight into the Turkish real estate investment funds (T-REIFs) by comparing their risk-return performances with the main benchmark investment tool Istanbul Stock Exchange-100 (BIST-100) Index. This study evaluated the performance of T-REIFs in four different periods between January 2017 and December 2020 (2017m1–2017m12, 2018m1–2018m12, 2019m1–2019m12 and 2020m1–2020m12) including the Coronavirus Disease (Covid-19) period by applying the Sharpe and Treynor ratios. In a well-diversified portfolio both ratios give the same results, but in the presence of non-systematic risk and the portfolio is poorly diversified, the Treynor ratio is a better indicator than the Sharpe ratio. The findings of this study show that rankings of Sharpe and Treynor ratios may differ for each period. These results also support the fact that the portfolios of funds in the Turkish real estate market are not well diversified. By providing corporate tax exemptions, and by enabling the investors to diversify their investments and reduce their risks, real estate investment funds are important alternatives to direct real estate investments in Turkey. In that context, being one of the pioneer studies in this niche and a new topic in emerging markets, analyzing the return performances of T-REIFs and comparing them with the returns of the BIST-100 index is aimed to contribute to literature as well as provide insight to investors who may consider investing in the Turkish real estate capital market instruments.

Benefits of Open Architecture and Multi-Management in Real Estate Markets—Evidence from French Nonlisted Investment Trusts

Using a unique dataset of Societes Civiles de Placement Immobilier (SCPIs), the authors provide evidence that the French nonlisted real estate investment funds market exhibits a substantial level of dispersion in risk and return characteristics. The authors find several attributes to have meaningful explanatory power with respect to such differences in risk and performance. They also find that portfolios of nonlisted real estate investment funds exhibit a substantially lower level of volatility than the average fund in the panel and that 15 SCPIs are enough to capture over 90% of these diversification benefits. Taken together, these results suggest that substantial value can be added by selection and allocation decisions, which could form the basis for a welfare-enhancing open architecture multi-management approach to investment in unlisted real estate investment trusts. TOPICS:Real estate, developed markets, portfolio construction, performance measurement Key Findings ▪ Open architecture and multi-management are untapped sources of added value in the French unlisted real estate fund market. ▪ Through suitable selection and diversification decisions, investors in French real estate funds can achieve substantially higher risk-adjusted performance. ▪ These insights can be of potential relevance for other unlisted real estate investment trust markets.

Risk spillovers and diversification between oil and non-ferrous metals during bear and bull market states

This paper examines the dependence structure, risk spillovers and conditional diversification benefits (CDBs) between oil and six non-ferrous metals futures markets (aluminum, copper, lead, nickel, tin, and zinc), using a variety of copula functions and Conditional Value at Risk (CoVaR) measure. The results show significant lower tail dependence and upper tail independence between oil and non-ferrous metals markets. The lower temporal dependence is positive and heterogeneous between oil and non-ferrous markets and intensified during the onset of the global financial crisis (GFC) for copper, lead, and tin markets. The upside and downside spillovers from oil to non-ferrous markets and vice versa is significant and increased during times of GFC, oil price crash, and COVID-19 outbreak. The highest spillover effects are observed for the aluminum market, which is very vulnerable to oil price instabilities. Moreover, the spillover effects are asymmetric for all markets. Finally, we find that the CDB for aluminum and nickel are quite similar, and for lead, tin and zinc are also closed the same. The CDB is higher for nickel regardless of the portfolio composition and the probability level. The diversification gains decrease during stress market periods. Our findings have important implications in terms of funds allocation and portfolio design.

Optimal Currency Allocation to Add Alpha and Reduce Risk

We propose a framework for optimal currency allocations taken relative to a strategic benchmark, which may build in existing hedging positions. We determine optimal currency positions to obtain higher expected returns than the benchmark holding the risk constant, or to reduce risk but hold the expected return of the benchmark constant, or both. The currency exposures relative to the strategic benchmark are considered jointly across all asset classes and currencies. We make the intuition explicit in a theoretical setting without constraints and empirically illustrate the framework with two portfolios: a representative portfolio for a Wealth manager denominated in Euros and a typical pension fund portfolio denominated in Pounds. Optimal currency allocations to reduce risk tend to hedge all or a significant fraction of currency exposures for both portfolios. We find certain hedges, like to Australian dollars for the Euro Wealth investor and Japanese Yen for the GBP pension portfolio, to be optimal to maximize returns with the same risk as the strategic benchmark.

Keeping Promises? Carbon Risk Disclosure and Mutual Fund Portfolios

Morningstar’s disclosure of fund level carbon risk (CR) scores reveals that pre-disclosure (environmentally) sustainable funds in the US had lower portfolio CR scores than convention funds and showed a further significant relative reduction post-disclosure, consistent with a causal impact of disclosures. Contrary to perception, conventional funds that are signatories to UN’s Principles for Responsible Investment (PRI) or those with secondary sustainability mandates appear to be pretentious―behaving more like other conventional funds rather than sustainable funds. Indeed, fund managers are sensitive to disclosures only in the presence of binding commitments to environment sustainability. Sustainable funds lower their CR score by reducing exposure to fossil fuels, not by increasing exposure to renewables.

Venture capitalists and assurance services on initial public offerings

We investigate the effects of venture capital ownership on the demand for auditor reputation, the supply of assurance services, and the quality of financial reporting in the market for new issues. Extensive research exists on the relation between auditing and ownership, however, limited research exists on the relation between auditing and venture capital ownership, a form of ownership characterized as activist and that goes beyond the simple provision of capital. We find that venture capital ownership increases the demand for auditor reputation and that auditors provide a higher level of assurance service to a venture-capital-backed IPO. We also find that the presence of a venture capitalist is associated with lower financial reporting quality, however, this effect is largely offset when a high reputation auditor is also on the IPO. Our evidence is consistent with the argument that venture capitalists on the IPO influence the choice and the extent of auditing to communicate information to investors in a manner that maximizes venture capitalists’ returns for their portfolio fund.

The Use of ETFs in Internationally-Focused Mutual Fund Portfolios

We explore the implications of US-based, internationally-focused equity mutual funds holding exchange traded funds (ETFs). We observe significant differences in how ETFs are used by international mutual funds compared to their domestic equity counterparts. Internationally-focused mutual funds use ETFs to alter the return-based and country risk exposures of the mutual fund. In addition to altering the risk of the fund, we find increases in ETF-use coincide with a change in performance, an investment in a greater number of countries, and a reduction the number of direct equity holdings.

Can Machine Learning Help to Select Portfolios of Mutual Funds?

Identifying outperforming mutual funds ex-ante is a notoriously difficult task. We use machine learning to exploit fund characteristics and construct portfolios of equity funds that earn positive and significant out-of-sample alpha net of all costs. In contrast, alphas of portfolios selected with OLS are indistinguishable from zero. We show that the performance of machine-learning methods is the joint outcome of exploiting multiple fund characteristics and allowing for flexibility in the relation between characteristics and performance. Our results hold also for portfolios of only retail funds, for various measures of fund performance, for different methodological choices, and across different market conditions.

Implementation of the Markowitz method in the Robo-Advisor application for best investment selection

Investment is the best way to ensure financial security in the future. The number of investment choices available often makes potential investors confused in determining the right investment choice. The purpose of this study is to implement the Markowitz Method in the Robo-Advisor application to the selection of appropriate mutual fund investment products. This research is experimental in finding the best mutual fund portfolio. The Mutual Funds products used are Danareksa Flexible Orchid (DAF), Bahana Trailblazer Fund (BTF), CIMB Principal Total Return Equity (CIMBPTRE), and Danareksa Mawar Consumer 10 (DMK). The data used amounted to 60 data from 2014 to 2018. Based on the results of calculations, the first portfolio has a higher return rate of 0.55%, while the second portfolio has a return rate of 0.54%.