Mutual Funds
Author Shruti Bagul
Literature view
1. Why Do Mutual Funds Hold Lottery Stocks?
The article examines the behavior of mutual fund investors seeking out extreme fund returns and the strategies used by fund managers to exploit this behavior. The study finds that funds with more lottery holdings attract larger flows, suggesting managers cater to investors’ preferences for lottery stocks, although managers themselves tend to avoid such stocks. Funds with worst and midrange performance have stronger incentives to invest in lottery stocks, as benefits outweigh costs at a smaller threshold of lottery holdings. The study also uncovers strong seasonality in lottery holdings, with funds performing poorly earlier in the year significantly increasing their investments in lottery stocks later in the year. Finally, a decrease in institutional demand for lottery stocks is associated with stronger underperformance of these stocks, and higher aggregate mutual fund lottery holdings contribute to the overpricing of lottery stocks.
2. Benchmark Discrepancies and Mutual Fund Performance Evaluation.
The article discusses how mutual funds can act strategically when constructing their portfolios in order to overstate their relative performance to investors through benchmark discrepancies. While most funds appear to have risk-appropriate prospectus benchmarks, a significant portion of them understate risk and benefit from the resulting performance overstatement, leading to increased flows of investments. Fund sponsors and managers may have incentives to allow persistent benchmark discrepancies, which investors should be cautious of when using prospectus benchmarks to evaluate fund performance
3. Individual Commitment and Team Performance: Evidence from Mutual Fund Managers.
In this study, the authors examined the impact of individual commitment on team performance in the context of mutual fund management. They found that a committed team, in which at least one team member works only for the fund, outperformed a non-committed team, in which every team member also ran other funds at the same time. This is consistent with previous research that suggests individual commitment has a positive effect on incentives and team performance. The authors also explored why non-committed teams are increasingly used despite their underperformance. The study has practical implications for selecting mutual funds.
4. Does short‐selling affect mutual fund shareholdings? Evidence from China.
This paper investigates mutual fund managers’ strategies towards short-selling activity by analysing their shareholdings in shortable stocks before and after the gradual liftings of short-sale bans in the Chinese stock market from 2010 to 2019. The authors find that mutual fund managers tend to hold fewer shares in shortable stocks than short-sale forbidden stocks after the announcement of short-sale list extensions. This reduction in shareholding is more intensive among stocks with higher valuation, larger size, higher profitability, higher investment rate, broader media coverage, or better corporate governance. The authors argue that mutual funds tend to hold fewer shares in stocks with higher levels of short-selling activity due to their fear of short-sellers’ ability to dampen overvalued stock prices or spread pessimistic beliefs, undervaluing the firm’s good quality. The authors’ findings extend our understanding of the short-sale supply and the mutual fund trading strategies and suggest that mutual funds adjust their holdings according to variations in short-selling activity.
5. Measuring the financial and social performance of French mutual funds: A data envelopment analysis approach.
The paper presents a non-parametric technique (DEA) for assessing the social and financial performance of French mutual funds and investigating the efficiency of 112 French SRMFs. The study establishes eight different DEA models using various risk measures and ethical notations and finds that funds identified as efficient using DEA are also efficient using traditional financial measures. The study contributes to the literature on DEA and mutual funds and could be of significant interest to investors and fund managers. However, the study only examines funds over a specific period and future research could examine the case of SRMFs and the interaction among variables considered. The study also suggests examining various markets and the influence of changes in ESG scores on mutual funds’ investment.
The results show that the funds found to be efficient on a mean-variance space using traditional financial measures are also found to be DEA efficient. The study contributes to the literature by introducing the methodology and applying it to French mutual funds. The findings reveal that 18 funds are found to be efficient in the best cases. However, the study only examines funds over a specific period and future research could explore the efficiency evaluation through developing DEA models based on principal component analysis. The study could also be extended by examining various markets.
6. Do Mutual Funds Have Decreasing Returns to Scale? Evidence from Fund Mergers.
The study explores the relationship between fund size and performance in the context of fund mergers. The findings suggest that acquiring funds experience a decline in performance after a positive shock in size resulting from mergers, providing evidence in support of decreasing returns to scale for mutual funds. Small-cap funds, which are more liquidity-constrained, suffer more severe declines in performance compared with large-cap funds. These results suggest that the size-performance relation in the mutual fund industry is not purely driven by managerial skill but also affected by liquidity constraints.
7. Mutual-Fund-Affiliated Analysts and Stock Price Synchronicity: Evidence from China.
The study uses a unique dataset from China to examine the production of firm-specific information by mutual fund-affiliated analysts, who face conflicts of interest to deliver optimism-biased recommendations but also have incentives to provide high-quality forecasts. The results indicate that these analysts provide more firm-specific information to the market, leading to lower stock price synchronicity for the firms they cover. The effects are more pronounced for stocks that represent a significant exposure to mutual funds, and mutual-fund-affiliated analysts do more frequent site visits on those firms whose stocks are held by their mutual fund clients. Overall, the results suggest that mutual fund affiliations can incentivize analysts to outperform non-affiliated analysts in uncovering and disseminating firm-specific information, making them important financial intermediaries in the capital market.
8. Is It Who You Know or What You Know? Evidence from IPO Allocations and Mutual Fund Performance.
The article discusses the relationship between the educational background of mutual fund portfolio managers and their performance. The authors find that on average, graduates from elite universities have better analytical ability than those from less elite universities. However, they also argue that this does not necessarily mean that elite university graduates are smarter than their non-elite counterparts when it comes to managing mutual funds. Instead, the authors suggest that elite graduates are likely to be better connected, which may give them an advantage in the industry. The authors provide evidence to support this claim and suggest that mutual funds may hire elite graduates with less analytical ability due to the compensating benefits of their connections. Overall, the article offers insights into the factors that contribute to the performance of mutual fund portfolio managers.
9. Tail Risk and the Cross-Section of Mutual Fund Expected Returns.
The article explores the pricing impact of tail risk on actively managed equity mutual funds. The authors find that funds with high exposure to tail risk have higher expected returns compared to funds with low exposure. They use a time-varying aggregate tail risk measure and show that the tail risk premium is statistically and economically significant. This premium persists even when controlling for commonly used risk factors and fund characteristics. The authors also find that funds susceptible to tail risk tend to be small, young, have high management fees, and have managers who do not risk their own capital. Overall, the results suggest that fund managers’ high exposure to tail risk may contribute more to their superior performance than their stock-picking ability.
10. Mutual Funds: The Most Suitable Investment Avenue for Common People.
The study utilized a descriptive and empirical research design using a survey method to analyze investor preferences for mutual fund investment schemes. The study analyzed data from 281 investors who completed a structured questionnaire and identified factors important to understanding investor preferences. The study also analyzed the most popular mutual fund companies among respondents, with UTI Mutual Fund Schemes being the most popular, followed by SBI Mutual Funds and LIC Mutual Funds. The study’s results suggest that mutual funds have become increasingly popular in the market and are a suitable investment for individuals who invest their savings at regular intervals. The study’s findings can be useful to investment firms in advising their investors and financial organizations in designing more options for mutual fund investors.
Conclusion
In conclusion, these six articles cover various aspects of mutual fund behaviour and performance, including the impact of lottery stocks on fund flows, benchmark discrepancies and mutual fund performance evaluation, individual commitment and team performance in mutual fund management, mutual fund managers’ strategies towards short-selling activity, measuring the financial and social performance of French mutual funds, and the relationship between fund size and performance in the context of fund mergers. The studies provide valuable insights into the strategies used by fund managers and their impact on fund performance, as well as the factors that investors should consider when selecting mutual funds. Overall, these articles contribute to the literature on mutual funds and can be of significant interest to both investors and fund managers.
Reference
AGARWAL, V.; JIANG, L.; WEN, Q. Why Do Mutual Funds Hold Lottery Stocks? Journal of Financial & Quantitative Analysis, [s. l.], v. 57, n. 3, p. 825–856, 2022. DOI 10.1017/S0022109021000211. Disponível em: https://discovery.ebsco.com/linkprocessor/plink?id=b082a814-a7a5-3771-933d-c27b1258523d. Acesso em: 13 maio. 2023.
CREMERS, K. J. M.; FULKERSON, J. A.; RILEY, T. B. Benchmark Discrepancies and Mutual Fund Performance Evaluation. Journal of Financial & Quantitative Analysis, [s. l.], v. 57, n. 2, p. 543–571, 2022. DOI 10.1017/S0022109021000119. Disponível em: https://discovery.ebsco.com/linkprocessor/plink?id=e603f1bd-4805-3955-987b-2bd0eb525e6e. Acesso em: 13 maio. 2023.
LUO, J.; QIAO, Z. Individual Commitment and Team Performance: Evidence from Mutual Fund Managers. Journal of Financial & Quantitative Analysis, [s. l.], v. 55, n. 6, p. 2073–2098, 2020. DOI 10.1017/S0022109019000346. Disponível em: https://discovery.ebsco.com/linkprocessor/plink?id=049fb9f2-4518-3c3d-a6e5-13a77f09dde1. Acesso em: 13 maio. 2023.
LIU, X.; WAN, D. Does short‐selling affect mutual fund shareholdings? Evidence from China. Accounting & Finance, [s. l.], v. 62, n. 2, p. 1887–1923, 2022. DOI 10.1111/acfi.12843. Disponível em: https://discovery.ebsco.com/linkprocessor/plink?id=30a562fd-98b3-3c36-bf17-d0091fa50da0. Acesso em: 13 maio. 2023.
Measuring the financial and social performance of French mutual funds: A data envelopment analysis approach. Business Ethics, the Environment & Responsibility, [s. l.], v. 31, n. 2, p. 398–418, 2022. DOI 10.1111/beer.12424. Disponível em: https://discovery.ebsco.com/linkprocessor/plink?id=b5076a9e-a7ea-37ff-8b0f-813ef84378e9. Acesso em: 13 maio. 2023.
MCLEMORE, P. Do Mutual Funds Have Decreasing Returns to Scale? Evidence from Fund Mergers. Journal of Financial & Quantitative Analysis, [s. l.], v. 54, n. 4, p. 1683–1711, 2019. DOI 10.1017/S0022109018001023. Disponível em: https://discovery.ebsco.com/linkprocessor/plink?id=f171c901-f168-3245-b5b7-93d900078748. Acesso em: 13 maio. 2023.
JIANG, X. et al. Mutual-Fund-Affiliated Analysts and Stock Price Synchronicity: Evidence From China. Journal of Accounting, Auditing & Finance, [s. l.], v. 33, n. 3, p. 435–460, 2018. DOI 10.1177/0148558X16658372. Disponível em: https://discovery.ebsco.com/linkprocessor/plink?id=b888345e-542a-3607-8aa5-8dc99d013fdf. Acesso em: 13 maio. 2023.
HWANG, C.-Y.; TITMAN, S.; WANG, Y. Is It Who You Know or What You Know? Evidence from IPO Allocations and Mutual Fund Performance. Journal of Financial & Quantitative Analysis, [s. l.], v. 53, n. 6, p. 2491–2523, 2018. DOI 10.1017/S0022109018000534. Disponível em: https://discovery.ebsco.com/linkprocessor/plink?id=2381029e-bdc8-3f8d-ac24-74f6d013fe41. Acesso em: 13 maio. 2023.
KARAGIANNIS, N.; TOLIKAS, K. Tail Risk and the Cross-Section of Mutual Fund Expected Returns. Journal of Financial & Quantitative Analysis, [s. l.], v. 54, n. 1, p. 425–447, 2019. DOI 10.1017/S0022109018000650. Disponível em: https://discovery.ebsco.com/linkprocessor/plink?id=3dadf00e-9295-34b3-8274-ef3f83fa5941. Acesso em: 13 maio. 2023.
MITTAL, D. Mutual Funds: The Most Suitable Investment Avenue for Common People. IUP Journal of Accounting Research & Audit Practices, [s. l.], v. 20, n. 4, p. 395–405, 2021. Disponível em: https://discovery.ebsco.com/linkprocessor/plink?id=86e7951c-59e1-32bd-b58a-94ca51240a81. Acesso em: 13 maio. 2023.