Familial Support in the Mutual Fund Performance Competition

Numerous papers have presented evidence of mutual fund families engaging in self-interested behaviour, regardless of or contrary to the interests of its investors. Such findings have provoked industry backlash. Given the significance of the mutual fund industry in managing wealth (approx. US$31 trillion of assets under management as at December 2014), governance and agency issues are highly consequential. We contribute to this debate in two ways. First, we adopt a novel approach to identifying potential intra-family cross-subsidisation by examining its potential effects on the aggregate distribution of fund returns. After presenting our argument that mutual fund families are incentivized to concentrate cross-subsidies to constituent funds with high year-to-date returns in the fourth quarter, we test predictions arising from this hypothesis. In our linear regressions, the dependent variable are the difference in trailing-twelve-month returns of (1) the 1st and 2nd-ranked fund in each style by trailing-twelve-month returns, and (2) the 1st and 2nd-ranked funds by returns during first nine months of each twelve-month period. In our logistic regression, our dependent variable indicates whether the top-ranked fund by year-to-date returns within a style stays topranked at the end of the subsequent quarter. Second, we study whether fund families utilize internal trades to cross-subsidize their “high-value” member funds (i.e., outperforming or high-fee funds). Specifically, we apply Gaspar, Massa and Matos' (2006) empirical analysis with an updated dataset and a modified methodology, and test whether “opposite trade” between a high-value fund and a low-value fund increase the difference in net-of-style returns of two funds. In particular, we introduce a new "opposite trade" measure that varies linearly with the difference in the paired funds’ returns and, thus, fits our linear regression analysis well. In our first set of tests, we do not find evidence of cross-subsidisation in the aggregate distribution of fund returns. In the second set of tests, we use a modified version of Gaspar, Massa and Matos’ (2006) methodology, and again fail to find evidence of familial cross-subsidization. However, we find evidence of an alternative response to tournament opportunities: a modification of the risk level, conditional on year-to-date investment performance, consistent with Kempf, Ruenzi and Thiele (2009). Declaration relating to disposition of project thesis/dissertation I hereby grant to the University of New South Wales or its agents the right to archive and to make available my thesis or dissertation in whole or in part in the University libraries in all forms of media, now or here after known, subject to the provisions of the Copyright Act 1968. I retain all property rights, such as patent rights. I also retain the right to use in future works (such as articles or books) all or part of this thesis or dissertation. I also authorise University Microfilms to use the 350 word abstract of my thesis in Dissertation Abstracts International (this is applicable to doctoral theses only). Signature . Witness . Date The University recognises that there may be exceptional circumstances requiring restrictions on copying or conditions on use. Requests for restriction for a period of up to 2 years must be made in writing. Requests for a longer period of restriction may be considered in exceptional circumstances and require the approval of the Dean of Graduate Research. FOR OFFICE USE ONLY Date of completion of requirements for Award: THIS SHEET IS TO BE GLUED TO THE INSIDE FRONT COVER OF THE THESIS ~, ri 11 . /. ~ . \ . ~ ORIGINALITY STATEMENT 'I· hereby declare that this submission is my own work and to the best of my knowledge it contains no materials previously published or written by another person, or substantial proportions of material which have been accepted for the award of any other degree or diploma at UNSW or any other educational institution, except where due acknowledgement is made in the thesis. Any contribution made to the research by others, with whom I have worked at UNSW or elsewhere, is explicitly acknowledged in the thesis. I also declare that the intellectual content of this thesis is the product of my own work, except to the extent that assistance from others in the project's design and conception or in style, presentation and linguistic expression is acknowledged:' • COPYRIGHT STATEMENT 'I hereby grant the University of New South Wales or its agents the right to archive and to make available my thesis or dissertation in whole or part in the University libraries in all forms of media, now or here after known, subject to the provisions of the Copyright Act 1968. I retain all proprietary rights, such as patent rights. I also retain the right to use in future works (such as articles or books} all or part of this thesis or dissertation. I also auth_ orise University Microfilms to 1,1se the 350 word abstract of my thesis in Dissertation Abstract International (this is applicable to doctoral theses only}. I have either used no substantial portions of copyright material in my thesis or I have obtained permission to use copyright material; where permission has not been granted I have applied/will apply for a partial restriction of the digital copy of my thesis or dissertation. ' AUTHENTICITY STATEMENT 'I certify that the Library deposit digital copy is a direct equivalent of the final officially. approved version of my thesis. No emendation of content has occurred and if there are any minor variations in formattin�, they are the result of the conversion to digital format. ' •