Fund Performance and Social Responsibility: New Evidence using Social Active Share and Social Tracking Error

with Sadok El Ghoul, Forthcoming in Journal of Banking and Finance) Download

We examine the effects of socially responsible investing (SRI) on mutual fund performance. We use two proxies of deviation from SRI: social active share (SAS) and social tracking error (STE) which, respectively, capture the differences in holdings and returns between a fund and a socially responsible index, namely the MSCI KLD 400. Using a sample of 2516 U.S. mutual funds over the period 2010-2017, our univariate analysis shows that less socially responsible funds do not outperform more socially responsible funds. The multivariate analysis shows, however, some evidence that more socially responsible funds display higher risk-adjusted performance than their less socially responsible peers. Our results are consistent with the hypothesis that SRI does not significantly damage fund performance.

Fund Names vs. Family Names: Implications for Mutual Fund Flows

with Sadok El Ghoul, Forthcoming in Financial Review Download

An emerging literature has shown that investors are sensitive to mutual fund names. Using a sample of US equity funds over the period 1993-2017, we provide evidence that funds with a name closer to the family’s name attract more flows and display a stronger performance-flow relationship. We also find that retail investors, in comparison to institutional investors, are more affected by this name bias. Our results are in line with the literature on social biases and costly searches and show that seemingly innocuous differences in fund attributes – such as fund names – translate into significant differences in investor decisions.

Systematic ESG Risk and Stock Returns: Evidence from the United States during the 1991-2019 Period

with Duc Khuong Nguyen, Forthcoming in Business Ethics, the Environment & Responsibility Download

We examine a sample of U.S. mutual funds and find that, between 2003 and 2018, 28 funds have changed their name to a sustainability-related appellation. Following the name change, we observe three main outcomes: (i) an increase in fund flows, (ii) a significant rise in portfolio turnover, and (iii) no substantial change in fund betas and alpha.

What’s in a (Green) Name? The Consequences of Greening Fund Names on Fund Flows, Turnover, and Performance

with Sadok El Ghoul, Finance Research Letters, 2021 39. Download

We examine a sample of U.S. mutual funds and find that, between 2003 and 2018, 28 funds have changed their name to a sustainability-related appellation. Following the name change, we observe three main outcomes: (i) an increase in fund flows, (ii) a significant rise in portfolio turnover, and (iii) no substantial change in fund betas and alpha.

What Drives Active Share? Active Allocation vs. Active Selection

with Saurin Patel, Journal of Investment Management, 2020

Active Share is a popular measure of active management. However, it is not clear what drives Active Share. To improve our understanding, we decompose Active Share into Active Stock Selection (ASE) and Active Stock Weights (ASW). ASE captures portfolio weights in stocks outside the portfolio benchmark and correlates positively (88%) with Active Share. ASW captures portfolio weight deviations from market capitalization weights and correlates negatively (-55%). Furthermore, we find some evidence that ASE positively predicts performance, while ASW negatively predicts performance. Our results suggest that the benefits of Active Share stem from the selection decision rather than the weighting decision.

Portfolio Turnover Activity and Mutual Fund Performance

with Claudia Champagne and Saurin Patel, Managerial Finance, 2018, 44(3). Download

"The Emerald Literati Best Paper Award" of the year 2019 in the Managerial Finance.

We propose a new measure of portfolio activity, the Modified Turnover, which represents the portion of the portfolio that the manager changes from one quarter to the next. Compared with the traditional turnover, our Modified Turnover measure relies on portfolio holdings and takes into account the effects of offsetting trades and fund flows on portfolio turnover. We find evidence that high Modified Turnover predicts lower performance. The comparison between the highest and lowest quintiles sorted based on Modified Turnover reveals a difference of -2.41% in the annual risk-adjusted return. Furthermore, high Modified Turnover predicts lower net flows. We also find that Modified Turnover relates positively to other activeness measures while volatility, flows, size, number of stocks, and the expense ratio are significant determinants of Modified Turnover. Overall, our results suggest that frequent churning of a portfolio is value-destroying for investors and signals a manager’s lack of skill.

Does corporate social responsibility affect mutual fund performance and flows?

with Sadok El Ghoul, Journal of Banking and Finance, 2017, 77. Download

Among the 20 most cited articles published in the Journal of Banking and Finance since 2017

We use an asset-weighted composite corporate social responsibility (CSR) fund score to study the effects of CSR on fund performance and flows. Compared to low-CSR funds, high-CSR funds display poorer performance, stronger performance persistence, a weaker performance-flow relationship, and comparable persistence in flows. These findings are consistent with investors in high-CSR funds deriving utility from non-performance attributes.

A Note on Correcting for the Sorting Bias in Regression-Based Mutual Fund Tournament Tests

with Iwan Meier, Financial Markets and Portfolio Management, 2015, 29 (1). Download

The tournament hypothesis of Brown et al. (1996) conjectures that mutual funds with a below average performance over the first half of the year tend to increase their risk in the second half of the year. Schwarz (2012) argues that the methodologies that have been used to test this hypothesis are flawed because they are affected by a bias that results from sorting on return, which likely also sorts on risk. He argues that both the contingency and regression approaches that have been used in the literature are affected by this sorting bias. We demonstrate that simply including the standard deviation over the first half of the year in regression-based tests corrects for most of the bias and is as suitable to control for the sorting bias than the more complex Schwarz (2012) correction.

Fund performance and subsequent risk: a study on mutual fund tournaments using holdings-based measures

with Iwan Meier, Financial Markets and Portfolio Management, 2015, 29 (1). Download

"Zurich Cantonal Bank (ZKB) Best Paper Award" of the year 2015 of the Financial Markets and Portfolio Management

The tournament hypothesis of Brown et al. (1996) posits that managers of poorly performing funds actively increase portfolio risk in the second half of the year. At the same time, it is a well-established stylized fact that stock returns and the subsequent return standard deviation are negatively related. We propose a decomposition of fund return standard deviation for the second half of the year using holdings-based measures in order to distinguish between risk changes that result from holding the portfolio and those that are due to the trades of managers. To this end, we extend the return gap of Kacperczyk et al. (2008) to the return standard deviation dimension and define the volatility gap as the difference between fund return volatility and buy-and-hold portfolio volatility. Our empirical findings show that changes in the return volatilities of equity mutual funds are largely explained by shifts in buy-and-hold portfolio volatility. Thus, we find only weak evidence of tournament behavior among mutual funds.

Diversification versus Concentration Motives in Mutual Fund Mergers

with Maher Kooli, Journal of Wealth Management, 2014, 7 (2). Download

This study examines the commonality between characteristics of acquirers and those of targets in mutual fund mergers. A positive and significant commonality would align with acquirers targeting similar funds and thus expecting further concentration in their segment. An opposite result would lend credence to the hypothesis that acquirers aim to diversify away from their original characteristics. Our empirical results show that acquirers and targets share positively correlated total net assets, expenses, turnover, and age, whereas they exhibit nonsignificant correlations in performance and flows. Thus, the potential for diversification could stem from the latter two characteristics. We then test whether the differences between the characteristics of acquirers and targets predict the post-merger performance of the acquirers. We find that acquirers that target funds with poorer performance, higher turnover, and higher expense ratios exhibit a decrease in their post-merger performance.

The asset allocation of managers and investors: Evidence from hybrid funds

Journal of Wealth Management, 2013, 16 (3). Download

This paper analyzes the response of the asset allocation process to fund performance and the broad market conditions as well as the market determinants of fund flows for hybrid funds. Using a fairly large sample of hybrid funds, our findings reveal the following: First, managers increase their stock and reduce their bond allocations subsequent to periods of outperformance. Second, the stock allocation is positively correlated with past stock returns and negatively correlated with bond returns. For the bond allocation, we document a negative correlation with lagged stock and bond returns. Third, fund flows react favorably to an increase in stock and bond returns, while high-stock fund flows exhibit a higher sensitivity to stock returns.

Performance and characteristics of mutual fund starts

with Iwan Meier, European Journal of Finance, 2009, 15 (6). Download

We study the performance and portfolio characteristics of 828 newly launched U.S. equity mutual funds over the time period 1991-2005. These fund starts initially earn, on average, higher excess returns and higher abnormal returns. Their risk-adjusted performance is also superior to existing funds. Furthermore, we provide evidence for short-term persistence among top performing fund starts, however, a substantial fraction of funds drop from the top to the bottom decile over two subsequent periods. We find that returns of fund starts indeed exhibit higher total and unsystematic risk. Portfolios of new funds are typically also less diversified in terms of number of stocks and industry concentration and are invested in smaller and less liquid stocks.