Conflicting Family Values in Mutual Fund Families

Abstract

We analyze the investment behavior of affiliated funds of mutual funds (AFoMFs), which are mutual funds that can only invest in other funds in the family, and are offered by most large families. Though never mentioned in any prospectus, we discover that AFoMFs provide an insurance pool against temporary liquidity shocks to other funds in the family. We show that, though the family benefits because funds can avoid fire sales, the cost of this insurance is borne by the investors in the AFoMFs. The paper thus uncovers some of the hidden complexities of fiduciary responsibility in mutual fund families.

Mutual Fund Flows and Cross‐Fund Learning within Families

“…As Bhattacharya, Lee, and Pool (, p. 177–198) note, “AFoMFs are typically offered by larger families, in terms of both size (TNA) and the number of funds offered. This makes sense because, as AFoMFs invest only in family funds, AFoMFs will not exist if their investment opportunity set is small.” Therefore, we expect the influence of AFoMFs on fund flows to appear mainly in large families.…”

“…However, the amplification effect may not be as large as for the positive spillover. AsBhattacharya, Lee, and Pool (2013) show, large families may provide liquidity support for members' funds with outflows through AFoMFs. This mitigates the negative spillover effect.…”

Does institutional ownership predict mutual fund performance? An examination of undiscovered holdings within 13(f) reports

“…By directly examining institutions' 13(f) filings, our data reveals a broader composition of institutional mutual fund holdings than previously documented in the literature. We find that institutional investment in mutual funds is not restricted to institutional shares or affiliated funds, which have been the focus of existing fund performance studies (e.g., Bhattacharya, Lee, & Pool, 2013;Huang et al, 2012;James & Karceski, 2006). As shown in Panel C of Table 1, only 7% of the funds held by institutions exclusively offer institutional shares and 52% offer both institutional and retail shares.…”

“…The reasons why they actively invest in mutual funds have important implications in fund performance. For instance, if institutions invest in mutual funds to provide liquidity support for their family funds then investing in their own family funds would be their priority (Bhattacharya et al, ). If institutions seek the benefits reserved solely for them, they would invest primarily in institutional funds.…”

“…For instance, if institutions invest in mutual funds to provide liquidity support for their family funds then 30 See Christoffersen, Musto, and Wermers (2014) for a comprehensive review of fund flow and return relationship. investing in their own family funds would be their priority (Bhattacharya et al, 2013). If institutions seek the benefits reserved solely for them, they would invest primarily in institutional funds.…”