Mutual Fund Market Research Articles

Does the Asset Allocation Policy Affect the Performance of Climate-Themed Funds? Empirical Evidence from the Scandinavian Mutual Funds Market

The aim of this paper is to evaluate the performance of climate-themed mutual funds, taking into consideration the structure of their asset allocation, especially their geographical focus of investment. Additionally, the influence of differences in the industry allocations on the funds’ investment results is evaluated. Our analyses are based on climate-friendly mutual funds registered in Scandinavian countries (i.e., Denmark, Norway, and Sweden) during 2010–2019. To classify the analyzed funds as climate-friendly, we use the relative carbon footprint measure, which is a novelty in studies on ESG funds (meeting the environmental, social, and corporate governance criteria). In our analyses, we use the absolute performance as well as the relative performance methods. The obtained results confirm that geographical and industrial asset allocations significantly affect the performance of Scandinavian climate-friendly funds. On the basis of our studies, we may state that analyzed mutual funds do not get abnormal returns, and their performance mostly depends on the market state. Additionally, the unconditional firm size factor did not influence the return of particular portfolios, while the conditional firm size factor was significant for European, global, and North American funds. Moreover, the firm value factor was significant. Finally, the momentum factor was only significant for the emerging markets portfolio when it reached positive values.

Analysis of Indian Mutual Fund Market Mechanism: Present Status and Future Perspectives

Indian mutual fund industry (IMFI) offers a wide and large variety of mutual fund (MF) products for investment from different income groups. Although the IMFI has a lot of potential to play a key role in economic growth, there is not enough investment due to lack of knowledge and lot of myths. Here, we present the critically analyse the advances in the field of Indian MFs. In addition, the challenges related to IMFI are also identified and discussed. The paper enhances the understanding of Indian mutual funds to protect the interest of the investors and suggests the future perspectives in MFs field to increase the basket of Indian economy.

Risk and Return Evaluation of Malaysian Mutual Fund Market

Mutual funds are growing tremendously in Malaysia. Many investors have no time to select individual stocks or bonds in the market due to limited time, money and knowledge. Hence, mutual fund has to show up as a useful and preferred investment tool in the Malaysian market. Ten portfolios were chosen from two prominent mutual fund companies in Malaysia. Performance evaluation and risk measurements were applied to understand the performance of each portfolio. Paired T-test was tested on two portfolios with 45 individual stock in each portfolio. The result was rather intriguing as what was initially expected. There appear to be a difference in terms of decision when applying fundamental measurement using existing concept and measures such as Sharpe and Treynor. To conclude, there is no significant difference in items of risk and return performance in Conventional and Islamic mutual funds. However, further validation can be done with larger sample size or portfolio.

Do Investors Value Sustainability? A Natural Experiment Examining Ranking and Fund Flows

ABSTRACTExamining a shock to the salience of the sustainability of the U.S. mutual fund market, we present causal evidence that investors marketwide value sustainability: being categorized as low sustainability resulted in net outflows of more than $12 billion while being categorized as high sustainability led to net inflows of more than $24 billion. Experimental evidence suggests that sustainability is viewed as positively predicting future performance, but we do not find evidence that high‐sustainability funds outperform low‐sustainability funds. The evidence is consistent with positive affect influencing expectations of sustainable fund performance and nonpecuniary motives influencing investment decisions.

The Interaction of Market Risk and Idiosyncratic Risk on Equity Mutual Fund Returns

This study examines the importance of idiosyncratic and systematic risks in explaining equity fund returns in Malaysia. The level of market and idiosyncratic risk in a mutual fund depends on what asset class it invests in. Equity type asset classes are exposed to both systematic and idiosyncratic risk but research generally suggest that only systematic risk is relevant in mutual fund selection since idiosyncratic risk can be reduced through fund diversification. This study attempts to expand the insights of the risk-return relationship by providing additional evidence on the direct and indirect effects of investment risk on equity mutual fund returns. Employing partial least squares structural equation modelling (PLS-SEM), we also explore if idiosyncratic risk moderates the relationship between market risk and mutual fund returns. A sample of 150 Malaysian domestic equity mutual funds comprising of large, mid & small-cap equity funds were selected from the Morningstar website. The results indicate that market risk does not influence mutual funds returns but idiosyncratic risk has a significant and positive effect. Idiosyncratic risk is proxied by fund characteristics comprising of size, age, expenses and fund manager ability. This study shows that fund size, age or expenses are not significant and only the fund alpha which measures fund manager ability is relevant in predicting fund returns. The study also finds that the fund alpha moderates the influence of market risk on returns by changing the nature of the relationship from positive to negative.

An Analysis of Performance Evaluation of Mutual Funds Based on Fund Nature: A Case of Mutual Fund Market of Pakistan

Pakistan is an emergent country with a developing mutual fund industry. In Pakistan Mutual Fund existed since 1964 capital market conveying certain advantages like risk diversification, assured returns and professional management for the retail investors. There have been lack of evidence on the performance and determinates of performance in the Mutual Fund market of Pakistan. This research is performed to provide comprehensive evidence on the performance measurement of the Islamic and Conventional mutual fund industry in Pakistan. The research measured data of 102 mutual funds, which are divided into two isolated functional natures Islamic and conventional for the period of five years from 2010 to 2014. Performance of the funds is determined using performance measures of Sharpe measure, Treynor measure, Jenson’s Alpha and Information ratio. The performance of two segregations of the funds were measured and compared on yearly bases. Further, using Fama-French three-factor model along with an additional factor suggested by Carhart, the research measured abnormal returns on each of the fund and these abnormal returns were explained by fund characteristics of expense ratio, fund size, fund age and fund family size using cross sectional OLS estimation. No significant performance differences that were found between Islamic and conventional funds. Treynor measure and Jenson’s Alpha presented in-consistent and insignificant performance measurements. The research also provided evidence of a negative influence of expense ratio on mutual fund performance in Pakistan. The research will explore the mutual fund industry for better understanding and recommends devising alternative performance measurements and methods consistent with local context. Keywords: Mutual Funds Association of Pakistan, Asset Management Companies, Mutual Funds, Performance evaluation, Islamic and Conventional Mutual Funds. DOI : 10.7176/EJBM/11-22-01 Publication date : August 31 st 2019

Does rapid market growth enhance efficiency? An evaluation of the Chinese mutual fund market

In recent years, China’s mutual fund market has grown exponentially. With hundreds of new funds introduced into the market each year, an essential question to ask is whether this voluminous growth promotes funds’ efficiency, as funds compete for investment. To overcome the drawbacks of traditional portfolio performance metrics, this study utilizes a non-parametric model, data envelopment analysis (DEA), to assess the relative efficiency of equity and hybrid funds for 2016–2018. The empirical results show that despite the development in the fund industry, only a small portion of the funds are fully efficient. While efficiency improvement is observed in equity funds, the efficiency in hybrid funds actually deteriorates. On average, equity funds are more efficient and persistent in performance than hybrid funds. The empirical results also indicate that the primary areas of inefficiency are downside risk management and fund fee structures. For hybrid funds, fund size is also related to efficiency performance. The findings of this study offer implications for how to strengthen the development and stability of the Chinese mutual fund market.

How Rational and Competitive Is the Market for Mutual Funds?*

Abstract To explore the rationality and competitiveness of the mutual fund industry, we analyze the alpha of active and index mutual funds from a global sample of more than 60,000 equity and fixed income funds and test the null hypothesis that alphas to investors are zero. We distinguish between institutional and retail investors since there are significant differences in management fees, economies of scale, and information asymmetries between these two groups. Using a new robust statistical test, we cannot reject our null hypothesis for the majority of investment categories. We find that the average active fund has less exposure to traditional risk factors, but higher sensitivity to alternative risk premia. Fund persistence and the impact of size and fees add further support to our conclusion that the mutual fund industry is highly competitive, except for US domestic funds. This set of funds is excessively overfunded compared with other fund categories.

Why Is Investors' Mutual Fund Market Allocation Far from the Optimum?

We analyse the differences between the optimal portfolio of funds that a fully in-formed investor might select and the current structure of the mutual fund markets as characterized by the funds’ risk profile (conservative or aggressive) and target investor type (retail or wholesale). We find that the relationship between fund age, market share and change in total net assets – but not fees – and the optimal portfo-lio of funds depends on the structure of the mutual fund market.

Impact of competition on fund disclosures and consumer search costs

PurposeThe purpose of this paper is to investigate the impact of competition in financial markets on the frequency of portfolio disclosures by mutual funds and its implications for consumer search costs.Design/methodology/approachThe empirical analysis merges the Center for Research in Security Prices (CRSP) survivorship bias-free mutual fund database, the Thompson Financial CDA/ Spectrum holdings database and the CRSP stock price data. The sample covers the time period between 1993 and 2010 and OLS and logistic regressions are used to investigate the impact of competition on fund disclosures.FindingsThis paper finds that mutual fund disclosures decrease with market competition and this effect is amplified for funds holding illiquid assets. These results provide empirical support for the findings of Carlin et al. (2102). Mutual funds use portfolio disclosures as a marketing tool to attract investments in a tournament-like market, where superior relative performance and greater visibility are rewarded with convex payoffs. With competition, the likelihood of receiving new investments decreases for each fund and funds respond by reducing costly voluntary disclosures. The disclosure costs are higher for funds holding illiquid assets, and hence, the effect is stronger for them.Originality/valueThis paper has important policy implications for disclosures in a market where relative performance matters. The traditional view is that competition induces voluntary disclosure because entities would like to differentiate themselves from competitors, and hence, competition should increase market transparency. However, this paper sheds light on the negative consequence of competition in a tournament-like mutual fund market.

Reciprocal Lending Relationships Between Financial Conglomerates: Evidence from the Mexican Repo Market

This paper examines the reciprocal lending relationships between financial conglomerates (FCs) in the repo market to better understand the following key points: what motivates powerful firms to engage in this type of contemporaneous cross-funding relationship; and the implications of such reciprocal transactions for the agents involved and for the market as a whole. In particular, in terms of the implications, we focus on two dimensions: first, the potential effects that reciprocal lending has on the market power of FCs and the competitiveness of the repo market for mutual funds; and second, the potential implications that frequent and stable reciprocal lending can have in terms of data from the Mexican repo market, we show that reciprocal lending between financial conglomerates is mutually beneficial as it reduces search costs for borrowers and mitigates credit risk concerns for lenders. Further, we find that reciprocal lending favors market concentration of the repo lending in a few powerful funds and increases fund market power. Finally, we find that reciprocal lending also leads to centrality within the financial network and increases the dependence between the parties involved. Interestingly, a higher intensity of reciprocal lending can harmful, but this does not necessarily deteriorate financial stability.

Capital Allocation and the Market for Mutual Funds: Inspecting the Mechanism

We exploit heterogeneity in decreasing returns to scale parameters across funds to analyze their effects on capital allocation decisions in the mutual fund market. We find strong evidence that steeper decreasing returns to scale attenuate flow sensitivity to performance, which has a large effect on equilibrium fund sizes. Our results are consistent with a rational model for active management. We argue that an important fraction of cross-sectional variation in fund sizes is due to investors rationally anticipating the effects of scale on return performance.

Market Timing and Time Frequency

This paper shows the usefulness of selecting the appropriate time frequency to examine mutual fund market timing. Using a sample of daily returns for the UK, we find evidence of the benefit to increase the temporal frequency of the observations to estimate market timing as results present a greater significance when we use daily data in the analysis. We show that using daily instead of monthly observations increases the number of significant estimates of market timing ability. This suggests that the return frequency is important when examining mutual funds market timing performance. Another conclusion we can draw from this study is the small proportion of mutual funds that manage to beat the market by performing correct timing strategies, thus the UK mutual fund market confirms the conclusion from previous studies in another markets.

Mutual Fund Market Timing: Daily Evidence

We use the dynamic conditional correlation (DCC) model to estimate daily-frequency mutual fund betas. Compared to traditional estimates, daily betas better capture changes in fund risk stemming from daily fund trading activity. Based on these beta estimates and a two-stage estimation procedure, we find significant evidence of market timing ability among actively managed U.S. equity funds that is not apparent via standard approaches. Unlike traditional estimates, our timing estimates correlate positively with fund performance, consistent with the intuition that market timing enhances total returns. Market timing is especially evident during down markets, and successful timers exhibit low downside risk.

Investing in Mutual Funds Using the Bayesian Framework: Evidence from China

ABSTRACT We explore how to invest in the Chinese mutual fund market based on the Bayesian method. We extend the portfolio construction method by integrating additional information, such as nonbenchmark assets and longer-period historical data, and by incorporating investors’ prior beliefs about the mispricing rate and managerial skills. This study analyzes growth funds, value funds, and balanced funds in China and concludes that additional information can improve the accuracy of fund performance evaluation, which will assist the construction of a more effective fund portfolio. Furthermore, the empirical evidence shows that a fund portfolio constructed using the Bayesian method is effective in China’s mutual fund market, indicating that the Bayesian method can improve the performance of this kind of portfolio.

Measuring (In)Attention to Mutual Fund Fees: Evidence from Experiments

We structurally estimate investors’ attention to mutual fund fees in an experimental setting with a sample matching the U.S. population. We find that investors, on average, react to fees as if they are 57.4% of the actual size, but the attention level varies substantially across subjects. This under-reaction translates into $57 billion fees inadvertently paid by investors in the U.S. mutual funds market. We also evaluate the efficacy of fee disclosure policies proposed by the U.S. SEC to increase investors’ attention. We find limited effectiveness; they are primarily effective for people with high financial literacy, high income, and urban residence.

The role of active management and asset allocation policy on government and corporate bond fund returns

The role of asset allocation policy and active management on equity mutual fund returns has been a popular research topic, while there is almost no literature on the subject covering bond funds. We check sources of performance for Israeli corporate and government bond funds, which together account for above 70% of the Israeli mutual fund market, using a unique monthly database of approximately 10-years. Our results reveal that active management is far more important than policy for corporate bond fund returns, which is mainly attributable to managers' security selection skills. The reverse is true for government bond funds and strategic long term policies account for a larger part of excess market return variability. Furthermore, if we take into account management fees, government bond funds lose from active management. The greater heterogeneity of investments open to corporate bond funds is a possible explanation for the difference in results.

A Mutual Fund Market with Incomplete Information: The Role of an External Body

The literature dealing with price setting and quality assumes by default that investors believe that mutual funds are vertically differentiated. We consider also the case where they do not believe it and we show that it may call the market into question. To solve this problem we assume the existence of an external body to provide a market, composed of two mutual funds, with information. Thanks to its actions and the presence of sophisticated investors, a high quality mutual fund is induced to provide a higher level of quality and we determine a convenient level of quality stated by this external body that is preoccupied by its credibility.

Fund performance-flow relationship and the role of institutional reform

Extant literature shows the positive impact of institutional development on investor rationality and market efficiency. The authors extend this evidence by investigating the performance-flow relationship in the Chinese mutual fund market before and after the enforcement of the revised Law of the People’s Republic of China on Securities Investment Fund. Empirical evidence reveals that Chinese investors irrationally chase past star performers before institutional reform, but gradually become rational and less obsessed with star-chasing behaviors after reform. Moving one percentile upward in the relative performance among the star funds is associated with money inflows by 0.532% after reform, much lower than 1.433% before reform. The findings confirm the positive influence of institutional development on investor rationality and market efficiency. The successful experience can be borrowed by other emerging markets with less developed institutions.

Impact of Competition on Mutual Fund Marketing Expenses

In this paper, I study the impact of market competition on mutual fund marketing expenses. In a sample of US domestic equity mutual funds, I find that marketing expenses decrease with the competition. This effect is stronger for top-performing funds. These results are counterintuitive, as one would ordinarily expect funds to incur more marketing expenses in response to pressure from competing funds. However, these results support the narrative that mutual funds employ marketing to draw attention to their performance in a tournament-like market, where the top-performing funds (the winners) are rewarded with disproportionately high new investments. Higher competition decreases the chances of each fund to outperform the others and adversely affect their ability to attract new investments, and the funds respond by decreasing marketing expenses. Thus, competition appears to have implications for investor search cost.