Don't Take Their Word for It: The Misclassification of Bond Mutual Funds

CHEN, HUAIZHI; Cohen, Lauren; Gurun, Umit G.

doi:10.1111/jofi.13023

Cited by 52 publications

(3 citation statements)

References 67 publications

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“…The early studies of the U.S. bond mutual funds by Blake et al (1993) and Elton et al (1995) report funds' netof-fee underperformance that persists. This result is confirmed by Chen et al (2010), andChen et al (2021a), who find it is caused by the fund poor market timing ability or by the fund misclassification. Cici and Gibson (2012) or Moneta (2015) and Goldstein et al (2017) study U.S. bond fund managers' selectivity skills.…”

Section: Literature Reviewmentioning

confidence: 52%

Actual rate of the management fee in mutual funds of different styles

Perez

Szymczyk

2022

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Research background: Exponential growth of passive mutual funds after 2007?2008 global financial crisis put pressure on active fund managers to lower the management fees. The real costs of active fund management are, however, very often higher than the values of management fees reported publicly. Thus it is not easy to decide on the quality of the fund management and estimate the level of management charges optimal for the future fund performance. Purpose of the article: In this study, we propose to utilize an actual rate of the management fee (ARMF) disclosed in the management company financial statements as a measure of the real value of the management costs and investigate its determinants in mutual funds of different styles. Methods: Using a dataset of 21,618 monthly observations for 500 mutual funds from a market of diversified structure and high management fees charged we test the operating model of a mutual fund performance, and derive the formula of a before-fee return with the ARMF as its component. The fund performance is measured by a raw before-fee return and two types of risk-adjusted alphas based on the multifactor model of Carhart (1997) and the fund attributes. Later, using panel data we explain ARMF by mutual fund performance and attributes. We also compare the results to the ones obtained for the total operational cost (TOC) ? a value similar to ARMF that is disclosed in mutual fund financial reports. Findings & value added: We find that the proposed ARMF is related more to the size and not to the performance, age or a cash flow of mutual funds. We observe it among all studied fund styles. The largest deviations of the average ARMF are seen in the management companies that belong to the banks? capital groups. The proposed measure of the management fee included in the operating model of a mutual fund performance can be used for any local mutual fund worldwide, and compared with other fund markets of more or less diversified style structures.

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Section: Literature Reviewmentioning

confidence: 52%

Actual rate of the management fee in mutual funds of different styles

Perez

Szymczyk

2022

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“…Prior literature investigates other aspects of mutual fund disclosures. For example, research finds that funds (e.g., closet indexers) misrepresent their investment styles and holdings (e.g.,Chan et al 2002;Wermers 2012;Chen et al 2020), andZheng (2006) andAgarwal et al (2015) examine fund quarterly versus semiannual reporting. Prior evidence on narrative complexity is limited to descriptive tests inPhilpot & Johnson (2007), which find variation in reading scores across a sample of 60 disclosures for active mutual funds.…”

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confidence: 99%

Obfuscation in mutual funds

deHaan

Song

Xie

et al. 2021

Journal of Accounting and Economics

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“…For example, Chen, Cohen, and Gurun (2021) shows that a misclassification in bond mutual fund holdings understates the actual riskiness of portfolios, and creates the impression of outperformance. DiBartolomeo and Witkowski (1997) show that a significant proportion of equity mutual funds are misclassified and this could be due to competitive pressures and performance related compensation.…”

Section: Introductionmentioning

confidence: 99%

Three essays on mutual funds and benchmarking

Loh¹

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for their role in equipping me with the necessary foundational skills; all other faculty members for their time and contribution in one way or another; Bee Hua, Karen and the PhD office for their clarification on any administrative issues that I may have encountered.On a personal level, I express my heartfelt appreciation, gratitude, and love to my wife, Algie. Throughout this journey, she has been my pillar of support emotionally, physically, financially, and even spiritually. I am extremely grateful for her dedication as a mother, her patience as a wife, and her understanding as a friend. I also dedicate this in loving memory of my father and am immensely grateful to my mother for always doing her best.Last but not least, to my fellow PhD students, who have shared this path with me and offered not only a listening ear, but their friendship as well: thank you. In particular, I would like to express my gratitude to Hyemin and Peishu for always being available and ready to face any challenges with me head-on.

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Don't Take Their Word for It: The Misclassification of Bond Mutual Funds

Cited by 52 publications

References 67 publications

Actual rate of the management fee in mutual funds of different styles

Actual rate of the management fee in mutual funds of different styles

Obfuscation in mutual funds

Three essays on mutual funds and benchmarking

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