Do mutual fund ratings provide valuable information for retail investors?

2018 ◽  
Vol 35 (1) ◽  
pp. 137-152 ◽  
Author(s):  
Andreas Oehler ◽  
Andreas Höfer ◽  
Matthias Horn ◽  
Stefan Wendt
Keyword(s):  
Mutual Funds ◽  
Mutual Fund ◽  
Design Methodology ◽  
Investment Strategies ◽  
Monthly Basis ◽  
Content Type ◽  
Rating Agencies ◽  
Dynamic Investment ◽  
Retail Investors ◽  
Rating Changes

Purpose Retail investors use information provided by mutual fund rating agencies to make investment decisions. This paper aims to examine whether the ratings provide useful information to retail investors by analyzing the rating migration and closure risk of mutual funds that received Morningstar’s mutual fund ratings from 2005 to 2012. Design/methodology/approach The research design differentiates between buy-and-hold investment strategies and dynamic investment strategies. To assess the information content of mutual fund ratings for buy-and-hold investment strategies, the rating migration based on the first and the last mutual fund rating during two-, four-, six- and eight-year horizons is determined. With respect to dynamic investment strategies, the number of rating changes per fund on a monthly basis during these time horizons is calculated. Findings Mutual fund rating persistence is low or even inexistent, in particular, during longer time periods. Only for lower-rated funds, the rating appears to indicate higher risk of fund closure. In addition, mutual funds face a large number of up to 38 monthly rating changes in the eight-year window. Originality/value Mutual fund rating persistence has hardly been analyzed for funds offered to retail investors so far. This paper clearly points out that because of the extensive rating migration and the high number of monthly rating changes, retail investors barely benefit from using mutual fund ratings.

Director of SEC’s Division of Investment Management discusses alternative mutual funds

2014 ◽  
Vol 15 (4) ◽  
pp. 15-18
Author(s):  
Richard F. Kerr
Keyword(s):  
Mutual Funds ◽  
Financial Institutions ◽  
Mutual Fund ◽  
Design Methodology ◽  
Investment Strategies ◽  
Investment Management ◽  
Content Type ◽  
Fund Industry ◽  
Mutual Fund Industry ◽  
Alternative Investment

Purpose – To alert participants in the mutual fund industry to regulatory developments in the alternative mutual fund space as articulated by the SEC’s Director of the Division of Investment Management. Design/methodology/approach – Reviews the Director’s discussion of the SEC’s concerns related to Valuation, Liquidity, Leverage and Disclosure resulting from the proliferation of alternative mutual funds. Additionally, summarizes the Director’s comments regarding Board oversight of alternative mutual funds. Findings – While the Director’s speech does not establish any new law or regulation, it is a practical summary of the SEC’s expectations for mutual fund complexes when implementing and operating mutual funds with alternative investment strategies that have historically been the province of private funds. Originality/value – Practical explanation from experienced financial institutions lawyers.

FINRA fines broker-dealer for failing to apply Class A sales charge waivers for certain eligible customers on its mutual fund platform

2014 ◽  
Vol 15 (4) ◽  
pp. 53-56
Author(s):  
Richard F. Kerr
Keyword(s):  
Mutual Funds ◽  
Financial Institutions ◽  
Mutual Fund ◽  
Design Methodology ◽  
Content Type ◽  
Supervisory System ◽  
Enforcement Action ◽  
Class A

Purpose – To review FINRA enforcement action taken against a broker-dealer over failure to waive mutual fund sales charges for certain eligible customers and failure to establish, maintain, and enforce a supervisory system and written procedures reasonably designed to ensure eligible accounts received sales charge waivers as set forth in the mutual funds’ prospectuses. Design/methodology/approach – Reviews and summarizes FINRA’s finding’s regarding the broker-dealer’s failure to apply applicable mutual fund sales charge waivers, deficiencies in the broker-dealer’s supervisory system and written procedures resulting in the failure, resulting violations of FINRA rules, the broker-dealer’s remedial efforts, and the sanctions imposed. Findings – This settlement provides an important reminder for FINRA member broker-dealers of the need to ensure that eligible investors receive applicable sales charger waivers or are placed in the appropriate share class, and to establish, maintain, and enforce a supervisory system and written procedures reasonably designed to ensure eligible accounts received sales charge waivers as set forth in the mutual funds’ prospectuses. Originality/value – Practical explanation from experienced financial institutions lawyers.

Mutual fund alpha and daily market-timing ability

2019 ◽  
Vol 36 (4) ◽  
pp. 662-681
Author(s):  
Qiang Bu
Keyword(s):  
Mutual Funds ◽  
Mutual Fund ◽  
Design Methodology ◽  
Market Timing ◽  
Content Type ◽  
Market Return ◽  
Timing Ability

Purpose This study aims to examine whether mutual funds can earn daily alpha and time daily market return. Design/methodology/approach Based on the Treynor and Mazuy (1966) model and the Henriksson and Merton (1981) model, the author tests the daily market-timing ability of actual mutual funds and bootstrapped mutual funds. Findings The author finds that daily alpha and daily market-timing ability can come from pure luck. In addition, the relation between fund alpha and market-timing ability is at best minimal. Originality/value Using bootstrapped funds as the benchmark, this study shows that daily fund market is overall efficient.

Actively managed ETFs vs actively managed mutual funds

2018 ◽  
Vol 44 (3) ◽  
pp. 303-325 ◽  
Author(s):  
D. Eli Sherrill ◽  
Kate Upton
Keyword(s):  
Mutual Funds ◽  
Design Methodology ◽  
Exchange Traded Funds ◽  
Fixed Income ◽  
Content Type ◽  
Weak Evidence ◽  
Retail Investors ◽  
Tax Clientele ◽  
Clientele Effects ◽  
Clientele Effect

Purpose The purpose of this paper is to study if actively managed exchange-traded funds (AMETFs) and actively managed mutual funds (AMMFs) are complements or substitutes. It also tests if there are tax or liquidity clientele effects. Design/methodology/approach The study investigates the relation between individual AMMF flows and aggregate AMETF flows as well as individual AMETF flows and aggregate AMMF flows. A 2013 tax change is used to analyze if a tax clientele effect exists between the AMETF and AMMF markets. The authors use differences in investor groups for institutional vs retail fund share classes to test for liquidity clientele effects. Findings The authors find that equity and mixed AMETFs and AMMFs are substitutes, although not perfect substitutes. Taxation-related differences between the two products create a clientele effect for fixed income and mixed funds where tax-sensitive investors are more likely to substitute AMETFs for AMMFs surrounding tax increases. There is weak evidence that institutional investors may prefer AMETFs more than retail investors because of their enhanced liquidity. Originality/value This is the first study to investigate the flow relation between AMETFs and AMMFs. The fast-paced growth of the AMETF area coupled with the substitutability between the two products and tax advantages of AMETFs has the capability to gain significant market share from AMMFs in the future.

Sustainability-themed mutual funds: an empirical examination of risk and performance

2018 ◽  
Vol 19 (3) ◽  
pp. 247-261 ◽  
Author(s):  
Federica Ielasi ◽  
Monica Rossolini ◽  
Sara Limberti
Keyword(s):  
Mutual Funds ◽  
Mutual Fund ◽  
Investment Strategies ◽  
Socially Responsible ◽  
Content Type ◽  
Responsible Investment ◽  
Fund Managers ◽  
And Performance ◽  
Sustainable And Responsible Investment ◽  
Ethical Funds

PurposeThis paper aims to analyze the portfolio characteristics and the performance measures of sustainability-themed mutual funds, compared to ethical mutual funds that implement different sustainable and responsible investment strategies.Design/methodology/approachThe study refers to a European sample of 106 ethical funds and 51 sustainability-themed funds. The monthly performance of each fund is downloaded from Bloomberg for the period from January 1996 to December 2015. By applying a Fama and French (1993) three-factor model, the authors overcome the limits of a capital asset pricing model (CAPM) based-single index model, to compare the performance of the two categories of funds.FindingsSustainability-themed funds do not differ significantly from ethical funds in terms of portfolio attributes, except for market capitalization, age and net asset value. Regarding performance measures, the results shows that sustainability-themed funds have a lower underperformance than ethical funds (as measured by Jensen’s alpha), whereas the samples do not differ in terms of market risk (as measured by Beta coefficient). The idiosyncratic risk of sustainability-themed funds is positively influenced by the specific portfolio strategies. The sustainability-themed funds show a higher concentration in the industrial sector and a lower exposure to financial sector than ethical funds; in terms of geographical strategy, they are more global and international oriented; they mainly focus on small caps and value stocks.Research limitations/implicationsThe different sustainable and responsible investment strategies can be applied simultaneously and in a growing number of possible combinations. Mutual fund managers can consider thematic approach as an efficient opportunity for reconciling financial performance and economic sustainability. It is demonstrated that sustainability-themed funds adopt a portfolio strategy significantly different from ethical funds and from the environmental, social and governance benchmarks. Mutual fund managers implement a thematic specialization without any negative impact on the funds returns compared to ethical funds; actually, with a proper diversified portfolio, they are able to reduce idiosyncratic risk.Originality/valueThe analysis is extremely innovative, especially for the thematic sample. During the past 15 years, literature about sustainable and responsible investment has been focused especially on the differences in terms of risk and performance between socially responsible and conventional funds. This paper, starting from the methodology applied in these studies, wants to compare two different types of socially responsible strategies, with a specific focus on sustainability-themed mutual funds, given their exponential growth in the past few years.

Impact of reporting delays on profitability of front-running strategies against mutual funds

2017 ◽  
Vol 43 (9) ◽  
pp. 999-1015 ◽  
Author(s):  
Sitikantha Parida
Keyword(s):  
Mutual Funds ◽  
Mutual Fund ◽  
Design Methodology ◽  
Content Type ◽  
Front Running ◽  
Reporting Delays ◽  
Public Disclosures ◽  
Reporting Delay ◽  
Practical Implications ◽  
Illiquid Assets

Purpose The purpose of this paper is to investigate if there is any impact of reporting delays on profitability of front-running strategies against the mutual funds. Design/methodology/approach The author studies if freshness of mutual fund holding information from public disclosures affects precision of flow-based front-running strategies against the funds and if the allowed 60-day reporting delay is able to protect the funds from these front-running activities against them. Findings Assuming no reporting delay, the author finds that returns from hypothetical front-running strategies are significant, when these are based on the most recent holding information and are not significant, when based on relatively old holding information. Interestingly, these front-running returns appear to be mostly driven by anticipated forced buys by the mutual funds (rather than anticipated forced sales). The return from a front-running strategy long on anticipated forced buys is higher when it is based on relatively illiquid assets. The author also finds that return from a front-running strategy short on anticipated forced sales is significant, when it is based on illiquid assets from relatively old holding information. Practical implications Hence, it appears that the allowed 60-day reporting delay is able to protect most of the funds from front-running activities against them, except for the funds holding illiquid assets from anticipated forced sales motivated front-running activities against them. Originality/value The paper addresses an interesting question, which has not been studied before – if freshness of fund holding information helps the front-running strategies against the funds and if the allowed reporting delay is effective in protecting the funds from these activities.

SEC fines alternative mutual fund adviser for improper handling of fund assets

2015 ◽  
Vol 16 (2) ◽  
pp. 35-37
Author(s):  
Michael McGrath ◽  
Pablo J. Man
Keyword(s):  
Mutual Funds ◽  
Mutual Fund ◽  
Financial Services ◽  
Securities And Exchange Commission ◽  
Investment Strategies ◽  
Investment Company ◽  
Content Type ◽  
Enforcement Action ◽  
Policies And Procedures ◽  
Repurchase Agreements

Purpose – To explain that the Securities and Exchange Commission (“SEC”) brought and settled charges against an investment adviser to several alternative mutual funds alleging, among other charges, failure to comply with the custody requirements of the Investment Company Act of 1940, as amended (the “1940 Act”). Design/methodology/approach – To explain that the Securities and Exchange Commission (“SEC”) brought and settled charges against an investment adviser to several alternative mutual funds alleging, among other charges, failure to comply with the custody requirements of the Investment Company Act of 1940, as amended (the “1940 Act”). Findings – The enforcement action serves as an important reminder for the growing number of advisers of alternative mutual funds to be mindful of specific restrictions and obligations when managing registered funds that do not apply to private funds and separate accounts. This action shows that the SEC will bring charges even when the alleged violations do not result in harm to investors. Practical implications – The 1940 Act, the rules thereunder, and SEC staff guidance relating to alternative investment strategies are complicated and not intuitive. These standards can constrain a registered fund’s ability to employ options, futures, swaps, prime brokerage, repurchase and reverse repurchase agreements, enhanced leverage through securities lending, and other facilities. As the SEC continues to examine alternative mutual funds, advisers to these funds should remain cognizant of the obligations arising under the 1940 Act and the implementation of fund policies and procedures. Originality/value – Practical guidance from experienced financial services lawyers.

SEC publishes guidance on mutual fund distribution and sub-accounting fees

2016 ◽  
Vol 17 (2) ◽  
pp. 39-42 ◽  
Author(s):  
Marco Adelfio ◽  
Paul J. Delligatti ◽  
Jason F. Monfort
Keyword(s):  
Mutual Funds ◽  
Mutual Fund ◽  
Financial Services ◽  
Design Methodology ◽  
Investment Management ◽  
Content Type ◽  
Enforcement Action ◽  
Policies And Procedures ◽  
Practical Guidance ◽  
Investment Advisers

Purpose To explain the guidance published on January 6, 2016 by the SEC’s Division of Investment Management containing its views and recommendations relating to mutual fund distribution and sub-accounting fees. Design/methodology/approach Explains the SEC’s Office of Compliance Inspections and Examinations focus on “distribution in guise” payments, its 2013 “sweep exam,” an enforcement action against a fund’s adviser and affiliated distributor related to payments for distribution-related activities outside of a 12b-1 plan, lists SEC staff recommendations with respect to mutual fund distribution and sub-accounting fees, summarizes the SEC’s guidance on board oversight of sub-accounting fees, provides indicia that a payment may be for distribution-related activities, and points to the need for mutual funds to have policies and procedures designed to prevent violations of Section 12(b) and Rule 12b-1. Findings The guidance is an outgrowth of the staff’s observations from a three-year “distribution in guise” sweep exam of mutual fund complexes, investment advisers, broker-dealers and transfer agents conducted by the SEC’s Office of Compliance Inspections and Examinations and other offices and divisions of the SEC to identify whether firms were using fund assets to directly or indirectly finance any activities primarily intended to result in the sale of fund shares outside of an approved Rule 12b-1 distribution plan. Originality/value Practical guidance from experienced financial services lawyers.

Constrained investments and opportunity cost – evidence from Islamic funds

2015 ◽  
Vol 41 (4) ◽  
pp. 348-367 ◽  
Author(s):  
Mustafa Dah ◽  
Monzurul Hoque ◽  
Song Wang
Keyword(s):  
Mutual Funds ◽  
Mutual Fund ◽  
Opportunity Cost ◽  
Islamic Law ◽  
World Population ◽  
Investment Strategies ◽  
Data Set ◽  
Content Type ◽  
The Impact ◽  
Integration Analysis

Purpose – The purpose of this paper is to examine the impact of Shariah guidelines on the performance of the Dow Jones Islamic Index (DJIM-US). Shariah or Islamic law is a set of rules that determines Islamic allowed activities including socially and ethically acceptable investments. Design/methodology/approach – The authors apply four risk-adjusted methodologies and co-integration analysis to investigate whether limited asset universe Shariah investments limit investment opportunities and impose an opportunity cost on investors given the prediction of conventional portfolio theories. Findings – In contrast to the prediction of conventional portfolio theories, the findings suggest no apparent opportunity cost for Shariah compatible investments. In particular, Dow Jones Islamic Mutual Funds do not under-perform the broader market US benchmarks nor do they have any co-integration with the broader indexes. Moreover, the authors find similar evidence in the studies of Islamic mutual funds in Saudi Arabia, Malaysia and Kuwait. Research limitations/implications – The findings will be reinforced when the authors will look into long run performance of Shariah compliant funds in future. Using non-linear approach will add further clarity to the findings. Practical implications – The results provide an insight suggesting that successful mutual fund managers are able to overcome Shariah restrictions and constraints through creative investment strategies. In the data set, the Amana Trust Growth fund and the Amana Trust Income fund were always the best performers with a highly significant abnormal return, no matter what the methodology was. Social implications – The performance of Islamic funds during the approximately seven-year period covered by the study is very promising. Popularity of Islamic Investment is expected to grow as Muslim population represents about 25 percent of the world population and the possibility for the Muslim funds to be considered as viable alternative by non-Shariah abiding or non-Muslim investors. The empirical results in the paper provide evidence that lack in diversification did not constrain the performance of Islamic funds. Originality/value – This paper applied comprehensive risk-adjusted methodologies and co-integration analysis to Islamic Funds for a seven-year period for multiple countries. The findings confirm previously obtained results and highlight the fact that constrained Islamic Funds may not under-perform as per conventional portfolio theories.

Large-cap vs small-cap portfolio performance: new empirical evidence from ETFs

2019 ◽  
Vol 18 (1) ◽  
pp. 71-94
Author(s):  
Gerasimos Rompotis
Keyword(s):  
Design Methodology ◽  
Portfolio Performance ◽  
Exchange Traded Funds ◽  
Investment Strategies ◽  
Time Data ◽  
Content Type ◽  
Risk Characteristics ◽  
The Usa ◽  
First Time ◽  
Practical Implications

PurposeA well-documented pattern in the literature concerns the outperformance of small-cap stocks relative to their larger-cap counterparts. This paper aims to address the “small-cap versus large-cap” issue using for the first time data from the exchange traded funds (ETFs) industry.Design/methodology/approachSeveral raw return and risk-adjusted return metrics are estimated over the period 2012-2016.FindingsResults are partially supportive of the “size effect”. In particular, small-cap ETFs outperform large-cap ETFs in overall raw return terms even though they fail the risk test. However, outperformance is not consistent on an annual basis. When risk-adjusted returns are taken into consideration, small-cap ETFs are inferior to their large-cap counterparts.Research limitations/implicationsThis research only covers the ETF market in the USA. However, given the tremendous growth of ETF markets worldwide, a similar examination of the “small vs large capitalization” issue could be conducted with data from other developed ETF markets in Europe and Asia. In such a case, useful comparisons could be made, so that we could conclude whether the findings of the current study are unique and US-specific or whether they could be generalized across the several international ETF markets.Practical implicationsA possible generalization of the findings would entail that profitable investment strategies could be based on the different performance and risk characteristics of small- and large-cap ETFs.Originality/valueThis is the first study to examine the performance of ETFs investing in large-cap stock indicesvis-à-visthe performance of ETFs tracking indices comprised of small-cap stocks.

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