Cash flow timing skills of socially responsible mutual fund investors

Journal of Empirical Finance

Vicente

2018

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This paper analyzes the cash flow timing skills of mutual fund investors, controlling for the hindsight effect (HE) by implementing the method developed by Hayley (2014) for stock market investors. Previous papers in the literature studying the timing skills of mutual fund investors do not control for this effect, which biases downward the actual timing skills of these investors. Accordingly, we analyze a sample of US domestic equity mutual funds in the period from January 1990 to January 2016. For each fund in the sample, we compute, over the entire period analyzed, the dollar-weighted monthly (DW) return, the geometric monthly (GM) return, the gap (the difference between the DW and the GM), the HE and the corrected timing measure after correcting for this effect. Before controlling for the HE, we find that mutual fund investors worsen the return that they achieve with their timing decisions by 1.80% annually (similar to the evidence provided previously in the literature). However, after controlling for the HE, we observe that investors really harm the returns that they achieve with their timing decisions by 0.71% annually. We establish several controls for different investment styles, and we obtain empirical evidence of the same phenomenon for all of them. Besides, we control for the size and age of the mutual fund (proxies for the level of information available for the fund). The results obtained indicate that investors in older and bigger funds show better timing skills than investors in younger and smaller funds. We also analyze how investors' level of sophistication affects our results by controlling for the net expense ratio, net income ratio, turnover ratio, institutional/non-institutional character, load/no-load regime and gap results. In general terms we observe that more sophisticated investors show better timing results and that the HE is more relevant to less sophisticated investors.

Section: Methodsmentioning

confidence: 99%

Section: Literature Reviewmentioning

confidence: 99%

Hindsight effect: What are the actual cash flow timing skills of mutual fund investors?

Journal of Empirical Finance

Vicente

2018

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“…The sample size of this research is larger than that of other studies examining the US market. For example, Muñoz (2016) analysed 194 SRMFs; the sample in Utz and Wimmer (2014) contained 230 SRMFs and Nofsinger and Varma (2014) identified 240 domestic equity SRMFs in the US market in the period 2000-2011. The data were obtained from the Morningstar Direct database.…”

Section: Data Descriptionmentioning

confidence: 99%

Style-changing behaviour in the socially responsible mutual fund industry: consequences on financial and sustainable performance

Vargas

Vicente

2021

SAMPJ

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Purpose This study aims to examine style-deviation practices in the socially responsible mutual funds (SMRF) industry i.e. how mutual funds game their stated financial objectives to earn a higher relative performance ranking. In addition, the consequences of such practices on sustainable scores and money flows are studied. Design/methodology/approach A sample of 454 US equity SRMFs is studied. This paper uses panel regressions controlling for time and style fixed-effects. Findings This study finds that 17.60% of SRMF managers in the sample are engaged in style deviation practices. These practices positively impact the sustainable performance of SRMFs and negatively impact their financial performance. One effect offsets the other and they consequently do not affect money flows. Another finding is that only investors with lower portfolio sustainability scores do show return-chaser behaviour. Practical implications This paper reveals that SRMF managers deviating from their stated financial style face a dilemma that is non-existent for their conventional peers that is style deviation practices affect financial and sustainable performance in opposing ways, whereas SRMF investor utility depends positively on both dimensions. The findings are not conclusive about the effectiveness of style deviation practices in attracting SRMF money flows. Social implications SRMF industry has experienced tremendous growth in the past decade. The increased competition in this industry has led managers to strive to attract investors, sometimes by relying on irregular practices that enhance their portfolio results. Regulators should consider how to avoid such perverse behaviour with a view to improving mutual funds transparency. Originality/value This is the first research that analyses style deviation practices and their consequences for the SRMF industry.

“…In recent years, many empirical papers have studied different issues concerning SR mutual funds. Most of these papers have focused on two main topics: (a) the financial performance of these funds (see, among many others, Bauer, Koedijk, & Otten, ; Chen & Scholtens, ; Cortez, Silva, & Areal, ; Muñoz, Vargas, & Marco, ; Nofsinger & Varma, ); and (b) the investment behavior of SR fund investors (see, among many others, Benson & Humphrey, ; Bollen, ; Muñoz, , ; Renneboog, Ter Horst, & Zhang, ; Riedl & Smeets, ). However, some relevant topics remain unexplored for this type of funds, for example the effect of boards of trustees’ characteristics on their effectiveness in safeguarding investors’ interests.…”

Section: Introductionmentioning

confidence: 99%

How do the size and independence of the board of trustees affect the financial and sustainable performance of socially responsible mutual funds?

Corp Soc Responsibility Env

2020

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In this article, I study for first time how the board of trustees’ size and independence influence the financial performance and sustainability scores of socially responsible (SR) mutual funds. The sample analyzed consists of 99 SR US domestic equity mutual funds existing in the period 2012–2018. The results obtained indicate that funds monitored by boards with a lower number of trustees and an independent chair show lower net expense ratios and better sustainability scores. In addition, smaller boards and a greater percentage of independent trustees are positively associated with the achievement of a better risk‐adjusted financial performance. Regarding SR strategies, negative screens are more likely among funds with larger and less independent boards whereas positive screens are more frequent when boards show the opposite characteristics. Another finding indicates that SR funds that implement positive screens present more industry concentrated portfolios that lead to the achievement of a more sustainable performance.