Tag: Mutual funds

Mutual Fund Flows When Managers Have Foreign-Sounding Names

Oliver Spalt is Professor of Behavioral Finance at Tilburg University. This post is based on an article authored by Professor Spalt; Alok Kumar, Professor of Finance at the University of Miami; and Alexandra Niessen-Ruenzi.

In our paper What’s in a Name? Mutual Fund Flows When Managers Have Foreign-Sounding Names, forthcoming in the Review of Financial Studies, we show that name-induced stereotypes affect the investment choices of U.S. mutual fund investors. Managers with foreign-sounding names have about 10% lower annual fund flows, and this effect is stronger among funds with investor clienteles that are more likely to be suspicious of foreigners ex ante.

Our results are based on a novel, hand-collected dataset that contains measures of foreignness of a large sample of mutual fund managers. Specifically, we conduct an online survey in which we present US residents with almost 4,000 actual fund manager names for actively managed US equity funds that appear in the CRSP database from 1993 to 2011. We then ask survey participants to rate for each name, whether or not it sounds foreign to them. Using their responses, we obtain for each fund a measure of whether the name of its manager sounds foreign to an investor when heard, read in a fund prospectus, or when it is found on a mutual fund web site. We hypothesize that the perceived foreignness of a name might trigger social biases such as discrimination and stereotyping and, thus, influence the investment decisions of mutual fund investors. We match our new dataset with the universe of actively managed US equity funds in the CRSP database to test this hypothesis.


Money Market Mutual Funds: Stress Testing & New Regulatory Requirements

Jeremy Berkowitz is Vice President in NERA’s Global Securities and Finance Practice. This post is based on a NERA publication authored by Dr. Berkowitz, Patrick E. Conroy, and Jordan Milev.

In July 2014, the Securities and Exchange Commission (SEC) adopted a package of reforms to the regulatory framework governing money market mutual funds. The SEC believes the new rules will enhance the safety and soundness of the money market fund industry during periods of market distress, when redemptions in some funds may increase substantially. [1]

The new rules require institutional prime (general purpose) and institutional municipal money market mutual funds to price and transact at a “floating” net asset value (NAV), permit certain money market mutual funds to charge liquidity fees, and allow the use of redemption gates to temporarily halt withdrawals during periods of stress.

Disentangling Mutual Fund Governance from Corporate Governance

The following post comes to us from Eric D. Roiter of Boston University School of Law.

Disentangling Mutual Fund Governance from Corporate Governance addresses mutual fund governance, explaining how in recent years it has become entangled with the norms and rules of corporate governance. At one level, it is understandable that mutual funds have been seen simply as a type of ordinary corporation, leading the SEC and the courts to treat mutual fund governance as simply a variation on the theme of corporate governance. Both mutual funds and corporations are separate legal entities, having directors and shareholders. Directors of each are held to fiduciary duties, charged with serving shareholders’ interests, and aspire to best practices. But there are fundamental differences between mutual funds and ordinary corporations, and this article contends that these differences have important implications for the governance of mutual funds, differences that should lead not to further entanglement of fund governance with corporate governance but to disentanglement.


Mutual Funds and Information Diffusion: The Role of Country-Level Governance

The following post comes to us from Chunmei Lin of the Department of Business and Economics at Erasmus University Rotterdam; Massimo Massa, Professor of Finance at INSEAD; and Hong Zhang of the PBC School of Finance, Tsinghua University.

If the institutions of a country (e.g., property rights and contracting institutions) jeopardize the quality of its financial market, can the market by itself put in force corrective mechanisms that counterbalance and offset such negative impact? This question is at the core of modern financial economics because it essentially asks whether the market plays a more fundamental role than institutions in shaping modern financial activities, or the other way around. While the role of institutions has many facets and is subtle in nature, in our paper, Mutual Funds and Information Diffusion: The Role of Country-Level Governance, forthcoming in the November issue of the Review of Financial Studies, we focus on one unique element of the market—the global mutual fund industry—to provide some new insights.


Opacity in Financial Markets

The following post comes to us from Yuki Sato of the Department of Finance at the University of Lausanne and the Swiss Finance Institute.

In my paper, Opacity in Financial Markets, forthcoming in the Review of Financial Studies, I study the implications of opacity in financial markets for investor behavior, asset prices, and welfare. In the model, transparent funds (e.g., mutual funds) and opaque funds (e.g., hedge funds) trade transparent assets (e.g., plain-vanilla products) and opaque assets (e.g., structured products). Investors observe neither opaque funds’ portfolios nor opaque assets’ payoffs. Consistent with empirical observations, the model predicts an “opacity price premium”: opaque assets trade at a premium over transparent ones despite identical payoffs. This premium arises because fund managers bid up opaque assets’ prices, as opacity potentially allows them to collect higher fees by manipulating investor assessments of their funds’ future prospects. The premium accompanies endogenous market segmentation: transparent funds trade only transparent assets, and opaque funds trade only opaque assets. A novel insight is that opacity is self-feeding in financial markets: given the opacity price premium, financial engineers exploit it by supplying opaque assets (that is, they render transparent assets opaque deliberately), which in turn are a source of agency problems in portfolio delegation, resulting in the opacity price premium.


Influence of Public Opinion on Investor Voting and Proxy Advisors

The following post comes to us from Reena Aggarwal, Professor of Finance at Georgetown University; Isil Erel of the Department of Finance at Ohio State University; and Laura Starks, Professor of Finance at the University of Texas at Austin.

In our paper, Influence of Public Opinion on Investor Voting and Proxy Advisors, which was recently made publicly available on SSRN, we address the question of how public opinion influences the proxy voting process. We find strong influence of public opinion on the evolution in both investor voting behavior and proxy advisor recommendations. Therefore, our results suggest that an additional channel through which the public can communicate with corporate management (and potentially influence corporate behavior) is the proxy voting process. We provide new evidence that media coverage can also influence firm behavior through the voting channel. This channel is important because media coverage captures the attention of proxy advisors, institutional investors and individual investors, and is thus reflected in recommendations and votes.


Window Dressing in Mutual Funds

The following post comes to us from Vikas Agarwal and Gerald Gay, both of the Department of Finance at Georgia State University, and Leng Ling of the College of Business at Georgia College & State University.

In our paper, Window Dressing in Mutual Funds, forthcoming in the Review of Financial Studies, we investigate an alleged agency problem in the mutual fund industry. This problem involves fund managers attempting to mislead investors about their true ability by trading in such a manner that they disclose at quarter ends disproportionately higher (lower) holdings in stocks that have recently done well (poorly). The portfolio churning associated with this practice of window dressing has potentially damaging effects on both fund value and performance.


Embracing Sponsor Support in Money Market Fund Reform

Jill E. Fisch is Perry Golkin Professor of Law and Co-Director of the Institute for Law & Economics at the University of Pennsylvania Law School.

Money market funds (MMFs) have, since the 2008 financial crisis, been deemed part of the nefarious shadow banking industry and targeted for regulatory reform. In my paper, The Broken Buck Stops Here: Embracing Sponsor Support in Money Market Fund Reform, I critically evaluate the logic behind current reform proposals, demonstrating that none of the proposals is likely to be effective in addressing the primary source of MMF stability—redemption demands in times of economic resources that impose pressure on MMF liquidity. In addition, inherent limitations in the mechanisms for calculating the fair value of MMF assets present a practical limitation on the utility of a floating NAV. I then offer an unprecedented alternative approach—mandatory sponsor support. My proposal would require MMF sponsors to commit to supporting their funds as a condition of offering a fund with a fixed $1 NAV.


Shareholder Governance through Disclosure

The following post comes to us from Jordan Schoenfeld of the Department of Accounting at the University of Michigan.

Index fund sponsors today oversee about 18% of all mutual fund and ETF assets (or $2.3 trillion), but their ability to govern is hampered by a pressing need to keep expense ratios low (ICI, 2013). Thus traditional governance channels, such as evaluating and guiding project selection by managers (intervention), are foreclosed to them. Neither can these fund sponsors strategically trade in response to private information, because they must hold the index. Nonetheless, index fund sponsors would still like to govern their portfolio companies, because high index returns mean more inflows into their funds and fees. In my paper, Shareholder Governance through Disclosure, which was recently made publicly available on SSRN, I conjecture that index fund sponsors govern by asking management of firms to disclose more about their activities. These disclosures can facilitate the monitoring activities of all stakeholders and increase firm value, thus benefiting the index fund sponsor. For example, more disclosure enhances other blockholders’ monitoring activities and makes stock prices more informative about management’s actions. In addition, eliciting such disclosures about current projects undertaken by management does not require the index fund sponsor to invest in and acquire specific skills about how to run the business. This feature of disclosure makes it particularly attractive to index fund sponsors, who compete by keeping their expenses low.


An Informed Approach to Issues Facing the Mutual Fund Industry

Luis A. Aguilar is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on Commissioner Aguilar’s remarks at the Mutual Fund Directors Forum’s 2014 Policy Conference; the full text, including footnotes, is available here. The views expressed in the post are those of Commissioner Aguilar and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

As a practicing securities lawyer for more than thirty years, I have in the past advised boards of directors, including mutual fund boards, and I am well acquainted with the important work that you do. I also understand the essential role that independent directors play in ensuring good corporate governance. As fiduciaries, you play a critical role in setting the appropriate tone at the top and overseeing the funds’ business. Thus, I commend the Mutual Fund Directors Forum’s efforts in providing a platform for independent mutual fund directors to share ideas and best practices. Improving fund governance is vital to investor protection and maintaining the integrity of our financial markets.


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