Open-end Mutual Funds Research Articles

Investor’s Contemplation of Firms Position and Stock Returns in the Open-ended Mutual Fund Scheme

Investor’s Contemplation of Firms Position and Stock Returns in the Open-ended Mutual Fund Scheme

The Effect of Large Macro Surprises on Mutual Funds' Liquidity Profile

We measure the liquidity profile of open-end mutual funds using the sensitivity of their daily returns to aggregate liquidity. We study how this sensitivity changes around real-activity macroeconomic announcements that reveal large surprises about the state of the economy and after three relevant market events: Bill Gross's departure from PIMCO, Third Avenue Focused Credit Fund's suspension of redemptions, and the effect of Lehman Brothers' collapse on Neuberger Berman. Results show that, following negative news, the sensitivity to aggregate liquidity increases for less-liquid mutual funds, like those that invest in the stocks of small companies and in high-yield corporate bonds. The effect is more pronounced during stress periods, suggesting that a deterioration in the funds' liquidity could amplify vulnerabilities in situations of already weak macroeconomic conditions.

Effects of Asymmetric Information on Market Timing in the Mutual Fund Industry

The paper investigates the effects of information asymmetry (between the realised return and the expected return) on market timing in the mutual fund industry. For the purpose, we use a panel of 1488 active open-end mutual funds for the period 2004-2013. We use fund-specific time-dynamic betas. Information asymmetry is measured as the standard deviation of idiosyncratic risk. The dataset is decomposed into five market fundamentals in order to emphasis the policy implications of our findings with respect to (i) equity, (ii) fixed income, (iii) allocation, (iv) alternative and (v) tax preferred mutual funds. The empirical evidence is based on endogeneity-robust Difference and System Generalised Method of Moments. The following findings are established. First, information asymmetry broadly follows the same trend as volatility, with a higher sensitivity to market risk exposure. Second, fund managers tend to raise (cutback) their risk exposure in time of high (low) market liquidity. Third, there is evidence of convergence in equity funds. We may therefore infer that equity funds with lower market risk exposure are catching-up with their counterparts with higher exposure to fluctuation in market conditions. The paper complements the scarce literature on market timing in the mutual fund industry with time-dynamic betas, information asymmetry and an endogeneity-robust empirical approach.

Efficiency measurement of open-ended mutual fund schemes with respect to Indian mutual fund industry

This paper investigates whether Indian mutual funds are performing efficiently and explores the corrective measures to improve their performance. It analyses 143 mutual fund schemes for 11 years through Data Envelopment Analysis (DEA) methodology by carrying out five DEA runs. Sharpe ratio and Jensen's alpha are the output and load fee, expense ratio, minimum initial investment needed and risk (β and α) are the inputs. Empirical analysis shows that fewer mutual fund schemes are performing efficiently and need to reduce their load and expense ratio. Also, maximum number of efficient schemes is of ELSS investment style followed by Income, Growth and Balance. DEA provides a set of peer group for each inefficient scheme and the targeted value of inputs has been computed. The present study is an exhaustive one and is useful for retail investors, mutual fund companies and policy makers.

Efficiency measurement of open-ended mutual fund schemes with respect to Indian mutual fund industry

This paper investigates whether Indian mutual funds are performing efficiently and explores the corrective measures to improve their performance. It analyses 143 mutual fund schemes for 11 years through Data Envelopment Analysis (DEA) methodology by carrying out five DEA runs. Sharpe ratio and Jensen's alpha are the output and load fee, expense ratio, minimum initial investment needed and risk (β and α) are the inputs. Empirical analysis shows that fewer mutual fund schemes are performing efficiently and need to reduce their load and expense ratio. Also, maximum number of efficient schemes is of ELSS investment style followed by Income, Growth and Balance. DEA provides a set of peer group for each inefficient scheme and the targeted value of inputs has been computed. The present study is an exhaustive one and is useful for retail investors, mutual fund companies and policy makers.

Catering to behavioral demand for dividends and its potential agency issue

Using a unique sample of open-ended mutual funds, which are not subject to “pass through” requirements, we test whether paying dividend creates a potential agency issue. We find that dividend yield (DY) is positively (negatively) related to a fund's post-dividend net cash flow (performance). In addition, small funds and funds suffering from low inflows have stronger incentives to distribute high dividends after controlling for dividend paying capacity. More importantly, the prevalent behavioral demand for dividend is mainly due to individual investors' dividend chasing. Thus, catering to a behavioral demand for dividends creates a potential agency issue rather than mitigating one.

Comparative risk adjusted performance of Islamic, socially responsible and conventional funds: Evidence from United Kingdom

This study investigates the risk and return characteristics of Islamic funds in comparison with SRI and the conventional open-end mutual funds for the UK, which, having attracted over £11.7 billion in Islamic investment in the past decade has emerged as the largest financial market for Islamic funds in the west. In addition, contrasting with previous literature, this research categorizes SRI and Islamic funds into two distinct types in order to allow a fair comparison. Our findings demonstrate that Islamic and SRI funds in general perform close to the conventional funds with significantly better risk-return tradeoff in US focused funds. Results further indicate that the UK-based Islamic and SRI funds were less effected during financial crisis as the magnitude of loss was significantly lower for them when compared to conventional funds. The research suggests that Islamic and SRI funds do provide a rational substitute and investors can benefit from investing in these funds as ethic and faith-based screening criteria do not affect the returns of Islamic and SRI funds adversely. This was also substantiated by our findings on investment behavior of these funds.

Conditional Market Timing in the Mutual Fund Industry

This study complements the scarce literature on conditional market timing in the mutual fund industry by assessing determinants of market timing throughout the distribution of market exposure. It builds on the intuition that the degree of responsiveness by fund managers to investigated factors (aggregate liquidity, information asymmetry, volatility and market excess return) is contingent on their levels of market exposure. To this end, we use a panel of 1467 active open-end mutual funds for the period 2004-2013. Fund-specific time-dynamic beta is employed and we avail room for more policy implications by disaggregating the dataset into market fundamentals of: equity, fixed income, allocation and tax preferred. The empirical evidence is based on Quantile regressions. The following findings are established. First, there is consistent positive threshold evidence of volatility and market return in market timing, with the slim exception of allocation funds for which the pattern of volatility is either U- or S-shaped. Second, the effect of volatility and market return are consistently positive and negative respectively in the bottom and top quintiles of market exposure, but for allocation funds. Third, the effects of information asymmetry and aggregate liquidity are positive and negative, contingent on specifications, level of market exposure and market fundamentals. The findings broadly suggest that blanket responses of market exposures to investigated factors are unlikely to represent feasible strategies for fund managers unless they are contingent on initial levels of market exposure and tailored differently across ‘highly exposed’-fund managers and ‘lowly exposed’-fund managers. Implications for investors and fund managers are discussed.

أثر سیاسة توزیع عائد نقدی للارباح على أداء صنادیق الاستثمار بالبورصة المصریة

الملخص تهدف هذه الدراسة إلى التعرف على أثر سياسة التوزيع النقدى للارباح على أداء صناديق الاستثمار بالبورصة المصرية ، ويشمل مجتمع البحث ( 6) صندوق من صناديق الاستثمار المفتوحة (الأسهم والمتوازنة) ولاجراء عملية التقييم فقد إعتمدت الباحثة على بيانات عوائد صناديق الاستثمار بالأسهم المحلية ، وقامت الباحثة بمعالجة وتحليل هذه البيانات إحصائيا وذلک بإستخدام معامل الإختلاف ومعامل بيتا ومؤشرات شارب ، ترينور، معدل العائد على الاموال المستثمرة تم التوصل من خلال إجراء البحث إلى أنه يوجد تأثير ذو دلالة إحصائية لسياسة التوزيع النقدى للارباح على أداء صناديق الاستثمار بالبورصة المصرية . Abstract This study aims to identify the impact of the cash distribution of profits on the performance of the investment funds of the Egyptian stock exchange policy, including the research community (6) Fund of open-ended mutual funds (equity and balanced) and an evaluation process researcher returns on investment funds and local equity data were adopted, and the researcher to address the analysis of these data statistically, using the coefficient of variation and beta coefficient and indicators of Sharp, Trainor, the rate of return on the money invested was reached through the research that there is a statistically significant effect of the policy of cash distribution of profits on the performance of funds only Investment Egyptian Stock Exchange.

Liquidity Transformation and Financial Stability: Evidence from the Cash Management of Open-End Italian Mutual Funds

A key structural vulnerability of open-end mutual funds is the potential liquidity mismatch between assets and liabilities. In this paper we study the management of liquidity transformation by open-end mutual funds through cash holdings and its potential implications for financial stability. Using supervisory data on Italian equity funds, we show that the amount of cash holdings reduces the probability that funds experiencing significant outflows make forced sales of assets that can potentially dislocate market valuations from fundamentals. Moreover, our results indicate that funds engaging in forced sales hold statistically more cash at the end of a month of financial distress than funds in financial distress that do not engage in forced sales. This evidence is consistent with recent empirical findings showing that funds facing significant redemptions may exacerbate periods of market stress by hoarding cash.

Redemption risk and cash hoarding by asset managers

Open-end mutual funds face investor redemptions, but the sale of the underlying assets depends on asset managers’ portfolio decisions. If asset managers use cash holdings as a buffer to meet redemptions, they can mitigate fire sales of the assets. If they hoard cash in response to redemptions, they will amplify fire sales. We present a global game model of investor runs and identify conditions under which asset managers hoard cash. In an empirical investigation of bond mutual funds, we find that cash hoarding is the rule rather than the exception, and that less liquid bond funds display stronger cash hoarding.

Exploring a Risk Adjusted Return on Capital Model for the Performance and Persistence of the Indian Equity Mutual Funds

Assisting fund investors in making better investment decisions when faced with market climate change is an important subject. For this purpose, the author adopts a genetic algorithm (GA) to search for an optimal decay factor for an exponential weighted moving average model, which is used to calculate the value at risk combined with risk-adjusted return on capital (RAROC). The author then proposed a GA-based RAROC model. Next, using the model to find the optimal decay factor and investigate the performance and persistence of 31 Indian open-end equity mutual funds over the period from November 2012 to October 2015, divided into three periods: November 2012- October 2013, November 2013- October 2014, and November 2014- October 2015, which includes the global financial crisis. The author finds that for three periods, the optimal decay factors are 0.999, 0.951 and 0.990, respectively. The rankings of funds between bull and bear markets are quite different. Moreover, the proposed model improves performance persistence. That is, a fund's past performance will continue into the future.

A Dynamic Theory of Mutual Fund Runs and Liquidity Management

I model an open-end mutual fund investing in illiquid assets and show that the fund’s endogenous cash management can generate shareholder runs even with a flexible NAV. The fund optimally re-builds its cash buffers at time t 1 after outflows at t to prevent future forced sales of illiquid assets. However, cash rebuilding at t 1 implies predictable voluntary sales of illiquid assets and hence a predictable decline in NAV. This generates a first-mover advantage, leading to runs. A time-inconsistency problem aggravates runs: the fund may want to pre-commit not to re-build cash buffers but cannot credibly do so absent a commitment device.

Mutual Funds As Venture Capitalists? Evidence from Unicorns

Using novel contract-level data, we study the recent trend in open-end mutual funds investing in unicorns—highly valued, privately held start-ups—and the consequences of mutual fund investment for corporate governance provisions. Larger funds and those with more stable funding are more likely to invest in unicorns. Compared to venture capital groups (VCs), mutual funds appear to have weaker cash flow rights and to be less involved in terms of corporate governance, being particularly underrepresented on boards of directors. Having to carefully manage their own liquidity pushes mutual funds to require stronger redemption rights and eschew “pay-to-play” provisions, suggesting contractual choices consistent with mutual funds’ short-term capital sources.

Mutual Fund Capital Structure

The Investment Company Act of 1940 regulates the capital structure of mutual funds in order to restrain their leverage and speculative character. It is often (mistakenly) assumed that the law prohibits open-end mutual funds from borrowing money. This Article (i) analyzes the law governing mutual fund capital structure to reveal when (and to what extent) borrowing is allowed and (ii) examines a novel dataset on mutual fund capital structure that shows borrowing is an unexpectedly common practice. Using data on all registered investment companies in the U.S. from 1998 to 2013, I find that nearly 8% of open-end mutual funds, and 10% of all mutual funds, borrow money for leverage purposes each year. This figure increases to over 12% of funds when I include non-conventional forms of borrowing. In fact, mutual funds borrow about as often as they employ the most commonly used derivatives. Closed-end funds are more aggressive than open-end funds in their borrowing, often pushing leverage to the regulatory limits. I find that, in addition to borrowing for leverage purposes, mutual funds also borrow on a short-term basis to manage liquidity, via a host of practices: bank lines of credit, overdrafts on custodial accounts, and joint borrowing and lending facilities that allow funds to borrow from other funds. Recent regulatory initiatives (which focus on risks arising from illiquidity and derivatives) overlook the substantial borrowing practices of mutual funds.

A study on performance of equity linked tax saving mutual fund schemes in India

Privatization of Indian mutual fund industry has led to proliferation of mutual funds schemes. It takes many forms such as income funds, equity diversified funds, balanced funds, liquid funds, money market funds, Gilt funds, Equity linked tax saving schemes (ELSS), Exchange traded funds and overseas fund of funds. Equity linked tax saving is one of the recent origin with tax saving feature under sec. 80C of Income Tax Act 1961. It also gives investor the twin-advantage of capital appreciation and tax benefits. The period of study is two years, from July 2014-June 2016. 32 open-ended ELSS mutual funds which have been operating for more than two years and performing during the period of study (i.e. July 2014-June 2016) and for which the data were available on continuous basis is taken for the study. The study has used Sharpe, Treynor and Jensen performance measure to evaluate the fund's performance. Funds risk has been analysed using standard deviation and beta. According to study results the top 5 funds are Franklin India Tax shield-Growth, Axis Long Term Equity Fund-Growth, Escorts Tax Plan-Growth, IDBI Equity Advantage Fund-Growth Regular and Birla Sun Life Relief 96-Growth Option. By investing in these funds investor can get annualised return ranging from 23.28 percent to 15.47 percent. The bottom 5 five funds are HSBC Tax Saver Equity Fund-Growth, Union KBC Tax Saver Scheme-Growth Option, Taurus Tax Shield-Growth Option, Sahara Tax Gain-Growth and L&T Tax Advantage Fund-Regular Plan-Growth Option. These funds have to be avoided while making investment.

A Dynamic Theory of Mutual Fund Runs and Liquidity Management

I model an open-end mutual fund investing in illiquid assets and show that the fund’s endogenous cash management can generate shareholder runs even with a flexible NAV. The fund optimally re-builds its cash buffers at time t + 1 after outflows at t to prevent future forced sales of illiquid assets. However, cash rebuilding at t + 1 implies predictable voluntary sales of illiquid assets, generating a predictable decline in NAV. This generates a first-mover advantage, leading to runs. A time-inconsistency problem aggravates runs: the fund may want to pre-commit not to re-build cash buffers but cannot credibly do so absent a commitment device. JEL Classification: G01, G21, G23, G32, G33, D92

Larry Puglia and the T. Rowe Price Blue Chip Growth Fund

Set in late 2016, this case recounts the remarkable performance record of Blue Chip Growth (BCGF), a mutual fund managed by Larry Puglia at T. Rowe Price, Inc. The case describes the investment style of Puglia, whose record with BCGF had on average outperformed the S&P 500 since the inception of the fund in 1993. The tasks for the student are to assess the performance of the fund, consider the sources of its success, and decide on the sustainability of Puglia's performance. Consistent with the introductory nature of the case, the analysis requires no numerical calculations. The instructor should not be deceived, however: the absorption of capital-market background and the implications of financial concepts in the case will fully occupy the novice. This case updates and replaces Bill Miller and Value Trust (UVA-F-1481) and Peter Lynch and the Fidelity Magellan Fund (UVA-F-0777). The case is intended for use in the opening stages of a finance course. It provides a nontechnical introduction to the U.S. equity markets and lays the foundation for some basic concepts in finance. Excerpt UVA-F-1772 Jun. 12, 2017 Larry Puglia and the T. Rowe Price Blue Chip Growth By late 2016, Larry J. Puglia had been managing the $ 33 billion T. Rowe Price Blue Chip Growth (Blue Chip Growth Fund) for more than 23 years. One of the fund's original managers, Puglia had been the sole manager of the open-ended mutual fund since 1997 and had generated superior returns on average for his investors over the life of the fund. Since inception in mid-1993 through September 30, 2016, the fund had returned an average annual total return of 10.12%, outperforming the 9.12% return of the fund's benchmark, the Standard & Poor's 500 Index (S&P 500). For most fund managers, beating the S&P 500 in any single year was an accomplishment, yet Puglia had served his investors well by performing better than competitor funds both in bull markets, such as that of the late 1990s, as well as the bear markets, such as that of the first decade of the 2000s. Exhibit 1 presents a summary of the Blue Chip Growth Fund. Exhibits 2 and 3 show the fund's performance and annual return versus its benchmark and other funds in the large-cap growth category. While Puglia, working out of T. Rowe Price's Baltimore, Maryland, headquarters, rarely had the best overall performance in any given year, and other managers had beaten his results over short-term periods, his overall long-term performance relative to the index was truly impressive. He ranked 20th out of 558 U.S. stock mutual funds with a single portfolio manager, and Morningstar had awarded the Blue Chip Growth its coveted five-star rating for the fund's five-year performance, placing it in the top 10% of 1,285 mutual funds investing in large-capitalization growth stocks. Puglia had also been nominated by Morningstar as one of five finalists for Domestic Manager of the Year in 2013. The fund had been recognized as an IBD Best Mutual Funds 2016 Awards winner by Investor's Business Daily (IBD). In addition, Money Magazine consistently named the fund to its annual selection of best funds, and Kiplinger's Personal Finance magazine included the fund on its list of 25 favorite funds.

Liquidity Risk in Markets with Trading Frictions: What Can Swing Pricing Achieve

Open-end mutual funds expose themselves to liquidity risk by granting their investors the right to daily redemptions at the fund's net asset value. We assess how swing pricing can dampen such risks by allowing the fund to settle investor orders at a price below the fund's net asset value. This reduces investors' incentive to redeem shares and mitigates the risk of large destabilising outflows.Optimal swing pricing balances this risk with the benefit of providing liquidity to cash-constrained investors. We derive bounds, depending on trading costs and the share of liquidity-constrained investors, within which a fund chooses to swing the settlement price. We also show how the optimal settlement price responds to unanticipated shocks. Finally, we discuss whether swing pricing can help mitigate the risk of self-fulfilling runs on funds.

Empirical Studies About the Time-Varying Performance of Open-End Mutual Funds and Risk-Shifting Incentive of Managers

Empirical Studies About the Time-Varying Performance of Open-End Mutual Funds and Risk-Shifting Incentive of Managers