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Purpose Using the sample between 2005 and 2011, the purpose of this paper is to investigate the effect of a new fund entry on incumbents using the overlap measure in portfolio holdings. Design/methodology/approach Empirical methodology is used in this study. Findings The authors find that incumbents that have a higher overlap with the entrants underperform subsequently. Based on the characteristic-based approach of Daniel et al. (1997), the authors find that the characteristic selectivity component is negatively correlated with the overlap measure, and thereby the decline in performance is driven by the stock-picking ability. The authors also discuss the unobserved actions of incumbents using the approach proposed by Kacperczyk et al. (2008) and find that incumbent unobserved actions do not benefit mutual fund investors in China. Finally the authors find that investors respond to the supply-side competition between entrants and incumbents quickly. These findings help us understand the mutual fund completion in China. Originality/value The findings in this study can help scholars, industry experts and regulatory authorities to understand the effect of competition in Chinese mutual fund industry.

Purpose To explain guidance from the US Securities and Exchange Commission (SEC) Division of Investment Management concerning registered investment companies’ business continuity and transition plans (BCPs). Design/methodology/approach Discusses the SEC’s concerns with fund complexes’ operational complexity and reliance on technology and third-party service providers, lists notable practices in the BCPs of some registered fund complexes, and addresses practical considerations. Findings While the SEC staff recognizes that it is not possible for a fund complex to anticipate or prevent every business continuity event, the staff also believes that fund complexes’ preparedness would be enhanced if in addition to complying with the federal securities laws, fund complexes and their advisers consider additional factors related to BCPs discussed in the Guidance. Practical implications It would be prudent for the fund boards to consider discussing the Guidance with fund investment advisers and fund CCOs to determine the status of fund complex BCPs and any gaps related to the Guidance. Boards may also want to review with their counsel the current BCP reporting framework and any enhancements needed in light of the Guidance. Originality/value Practical guidance from experienced securities, fund management, regulatory and compliance lawyers.

Purpose To explain the guidance published on January 6, 2016 by the SEC’s Division of Investment Management containing its views and recommendations relating to mutual fund distribution and sub-accounting fees. Design/methodology/approach Explains the SEC’s Office of Compliance Inspections and Examinations focus on “distribution in guise” payments, its 2013 “sweep exam,” an enforcement action against a fund’s adviser and affiliated distributor related to payments for distribution-related activities outside of a 12b-1 plan, lists SEC staff recommendations with respect to mutual fund distribution and sub-accounting fees, summarizes the SEC’s guidance on board oversight of sub-accounting fees, provides indicia that a payment may be for distribution-related activities, and points to the need for mutual funds to have policies and procedures designed to prevent violations of Section 12(b) and Rule 12b-1. Findings The guidance is an outgrowth of the staff’s observations from a three-year “distribution in guise” sweep exam of mutual fund complexes, investment advisers, broker-dealers and transfer agents conducted by the SEC’s Office of Compliance Inspections and Examinations and other offices and divisions of the SEC to identify whether firms were using fund assets to directly or indirectly finance any activities primarily intended to result in the sale of fund shares outside of an approved Rule 12b-1 distribution plan. Originality/value Practical guidance from experienced financial services lawyers.

Purpose – The purpose of this paper is to estimate the performance of 188 mutual funds relative to the risk/return frontier accounting for the transaction costs of producing a portfolio of investments. Design/methodology/approach – The directional output distance function is used to estimate mutual fund performance. The method allows the data to define a frontier of return and risk accounting for the transaction costs associated with securities management and production of risky returns. Proxies for the transaction costs of producing a portfolio of securities include the turnover ratio, load, expense ratio, and net asset value. The estimates of mutual fund performance are bootstrapped to account for the unknown data generating process. By comparing each mutual fund’s performance relative to the capital market line the authors determine how the fund should adjust their portfolio in regard to risk and return in order to maximize the inefficiency adjusted Sharpe ratio. Findings – The bootstrapped estimates indicate that the average mutual fund could simultaneously expand return and contract risk by 3.2 percent if it were to operate on the efficient frontier. After projecting each mutual fund’s return and risk to the efficient frontier the authors find that a majority of the mutual funds should reduce risk to be consistent with the capital market line. Originality/value – Many researchers have used data envelopment analysis to estimate a piecewise linear frontier of risk and return to measure mutual fund performance. To the authors’ knowledge the research is the first to use a twice-differentiable quadratic directional distance function to measure the managerial performance and risk/return tradeoff of mutual funds.

Purpose – To explain a recently settled administrative proceeding that the US Securities and Exchange Commission (SEC) brought against a private fund manager in connection with the use of fund assets to pay for the manager’s operating expenses. Design/methodology/approach – Explains the major takeaways from the settled case, and places them in the context of prior administrative proceedings and public statements from SEC staff. Findings – This case is the latest example of the SEC taking action against a private fund manager related to the improper deduction or allocation of expenses, and related disclosure lapses, and further cases are expected in the future. Practical implications – Private fund managers should examine their practices involving the reimbursement and allocation of expenses and related disclosures to fund investors. Originality/value – Practical guidance and explanation from experienced securities regulatory lawyers.

Purpose – The purpose of this paper is to study the determinants of aggregate fund flows to both equity and hybrid mutual funds. The authors test three hypotheses that help explaining the relationship between mutual fund flows and stock market returns, namely; the feedback-trader hypothesis, the price-pressure hypothesis, and the information-response hypothesis. Design/methodology/approach – The study relies on Swedish quarterly data on mutual fund flows over the period 1998-2013. The methodology is twofold; through the structural models (AR(1)) the authors can say something regarding the relationship between mutual fund flows and financial macro variables. The analysis is further strengthened by utilizing a vector autoregressive model to test for Granger causality in order to determine the order of events. Findings – Similar to both Warther (1995) and Jank (2012), the authors only find support for the information-response hypothesis. Additionally, the authors find new financial variables that have predictive power in determining mutual fund flows, namely; market fear (VIX), exchange rate, households’ expectation regarding inflation as well as outflows from mutual bond funds. Originality/value – The study contributes to the body of literature in three ways. First, it complements recent findings on determinants of mutual fund flows but the authors also add to the knowledge by included new macro financial variables describing the real economy. Second, the authors include a few additional variables. Third, the vast majority of previous studies have used US data, the authors add to that a deeper understanding of determinants of mutual fund flows in smaller economies by using Swedish data.

Purpose – To alert participants in the mutual fund industry to regulatory developments in the alternative mutual fund space as articulated by the SEC’s Director of the Division of Investment Management. Design/methodology/approach – Reviews the Director’s discussion of the SEC’s concerns related to Valuation, Liquidity, Leverage and Disclosure resulting from the proliferation of alternative mutual funds. Additionally, summarizes the Director’s comments regarding Board oversight of alternative mutual funds. Findings – While the Director’s speech does not establish any new law or regulation, it is a practical summary of the SEC’s expectations for mutual fund complexes when implementing and operating mutual funds with alternative investment strategies that have historically been the province of private funds. Originality/value – Practical explanation from experienced financial institutions lawyers.

Purpose– In Australia, the A$2.2 trillion managed funds industry including the large pension funds (known locally as superannuation funds) are the dominant institutional property investors. While statistical information on the level of Australian managed fund investments in property assets is widely available, comprehensive practical evidence on property asset allocation decision-making process is underdeveloped. The purpose of this research is to identify Australian fund manager's property asset allocation strategies and decision-making frameworks at strategic level.Design/methodology/approach– The research was undertaken in May-August 2011 using an in-depth semi-structured questionnaire administered by mail. The survey was targeted at 130 leading managed funds and asset consultants within Australia.Findings– The evaluation of the 79 survey respondents indicated that Australian fund manager's property allocation decision-making process is an interactive, sequential and continuous process involving multiple decision-makers (internal and external) complete with feedback loops. It involves a combination of quantitative analysis (mainly mean-variance analysis) and qualitative overlay (mainly judgement, or “gut-feeling”, and experience). In addition, the research provided evidence that the property allocation decision-making process varies depending on the size and type of managed fund.Practical implications– This research makes important contributions to both practical and academic fields. Information on strategic property allocation models and variables is not widely available, and there is little guiding theory related to the subject. Therefore, the conceptual frameworks developed from the research will help enhance academic theory and understanding in the area of property allocation decision making. Furthermore, the research provides small fund managers and industry practitioners with a platform from which to improve their own property allocation processes.Originality/value– In contrast to previous property decision-making research in Australia which has mainly focused on strategies at the property fund investment level, this research investigates the institutional property allocation decision-making process from a strategic position involving all major groups in the Australian managed funds industry.

Purpose – In financial planning, customers are typically confronted with choosing a premium payment scheme when investing in a mutual fund, which is often equipped with an investment guarantee to provide downside protection. Guarantee costs may thereby also be charged differently depending on the provider. The paper aims to investigate the impact of the premium payment method on different performance measures for a mutual fund with an investment guarantee. Design/methodology/approach – The paper compares a fund with annual and upfront premiums as well as constant guarantee costs versus the guarantee price as an annual percentage fee of the fund value, always ensuring that the present value of premium payments is the same for all product variants. The paper further studies the relevance of the guarantee level and the contract term. Findings – The results emphasize that even though the present value of premiums paid into the contract is the same, the type of premium (upfront versus annual) as well as the type of guarantee cost (upfront versus annual fee) has a considerable impact on the performance. Practical implications – Providers can thus make a product more attractive for consumers by individually adjusting the premium scheme depending on their preferences and by making the resulting risk-return-profile transparent, while keeping the other contract characteristics unchanged (e.g. extent of the guarantee). Originality/value – To date, there has been no comprehensive analysis with specific focus on the impact of different premium payment schemes (in particular with respect to savings premiums and guarantee costs) on risk and return of a mutual fund with otherwise given contract characteristics such as the underlying fund strategy and the investment guarantee, even though the premium scheme itself can already have a considerable impact on the terminal payoff distribution and thus risk-return profiles. In addition, such an analysis can provide important information for consumers and providers in designing and choosing attractive products by simply adjusting the premium scheme (if possible) instead of or in addition to changing other product features.

Purpose To explain the SEC’s historical focus on the calculation of investment performance and to highlight important issues for fund sponsors in the future. Design/methodology/approach This article discusses the SEC’s recent subpoena of at least one fund sponsor for information related to the firm’s practices in calculating internal rates of return and then explains the history of SEC enforcement in this area. Findings The SEC continues to be focused on how fund sponsors calculate investment performance metrics, such as IRRs, and the related disclosure. Originality/value This article contains valuable information for fund sponsors, such as best practices for valuation methods and related investment performance disclosures, including the calculation of IRRs from experienced investment fund lawyers.

PurposeThis paper aims to determine the impact of the economic crisis on the level of social commitment of the Spanish savings banks.Design/methodology/approachThe paper uses the information provided by Spanish savings banks (SSBs) for 2004‐2009. In particular, it analyses the evolution of the welfare fund, the financial results, and the ratio between the welfare fund and the financial results variables for each of the SBs, to go more thoroughly into how the welfare fund is distributed.FindingsThe evolution of the allocations to the welfare fund shows a significant decline in absolute numbers, as a logical consequence of the significant decrease in the financial results. However, a substantial WF/P ratio growth can be seen in 2008 – 27.81 per cent – and, above all, of 36.08 per cent in 2009. This has allowed a certain mitigation of the decline of the allocations. In addition, a change has taken place in the distribution of the welfare fund, the amount for health and social care being bigger than the amount spent on culture and leisure.Social implicationsThis paper aims to highlight the impact that the process of mergers and acquisitions can have on the survival and the social commitment of the SBs.Originality/valueThe paper provides a quantitative and qualitative analysis of the effect of the economic crisis on the social commitment of the Spanish savings banks.

PurposeCongress and the Securities and Exchange Commission (SEC) have mandated mutual fund disclosure regimes to help investors make better investment decisions to strike an optimal balance between the investors' interest in more timely and accurate portfolio holdings disclosure and the cost associated with making and disclosing the holdings information available to investors. Many academics and practitioners point out that, despite all the regulations on portfolio disclosure, fund managers can still engage in practices that go against the spirit of the rules without violating the letter of the law. The purpose of this paper is to address the empirical question of whether the practice exists, using holdings data for more than 3,000 equity mutual funds during the time period from 1995 to 2004.Design/methodology/approachIn this paper, the authors examine window dressing by mutual fund portfolio managers, using holdings data covering more than 3,000 equity mutual funds from 1995 to 2004. The authors first investigate whether the fund holdings are materially different from universe holdings across performance quintiles based on holdings in the month of disclosure and in the following month. The second part of the analysis examines funds' patterns of buying and selling. Finally, the measure of “Buying Intensity” and “Selling Intensity” is examined, with a specific focus on the holdings data for the fourth quarter.FindingsAn examination of fund holdings finds no statistically significant evidence of systematic window dressing, either at the aggregate level or within subsamples of funds based on size or past performance. Rather, it was found that fund managers tend to chase momentum. A combination of investor sophistication and market oversight may serve to be effective in dissuading fund managers from engaging in the practice.Originality/valueThe authors' data are at the individual fund level, based on equity mutual funds holdings data provided to Morningstar on a quarterly or monthly basis (according to Elton et al., the Morningstar database provides timely and accurate mutual fund holdings information). These data allow us to infer better the investment manager intent vis‐à‐vis using 13F data, which is aggregate data across various fund families and separate accounts, or aggregate pension fund equity holdings data that includes aggregate holdings of multiple portfolio managers. In addition, the authors comment on the significance of the regulatory checks and balances that are designed to restrict fund managers' ability to window‐dress their portfolios. In summary, the combination of quantitative evidence from empirical tests and an examination of the legal framework under which mutual fund portfolio managers operate, lead to the conclusion that window dressing is not prevalent in the industry.

PurposeThis article aims to outline in depth the European Commission's adopted implementing rules (the Regulation) for the Directive on Alternative Investment Fund Managers. These new regulations have been eagerly awaited by private equity fund managers and their investors who have been seeking a measure of certainty about how the AIFMD will be transposed into local law.Design/methodology/approachThis piece summarizes some of the key points of the Regulation.FindingsThis article addresses the rules in the Regulation concerning: the calculations of assets under management; capital requirements in relation to professional liability risks applicable to alternative investment fund managers; operating conditions for alternative investment fund managers, including liquidity management, organizational requirements and rules on valuation; conditions for delegation; rules on depositaries, including the depositary's tasks and liability; transparency, reporting and disclosure requirements; and rules for cooperation arrangements.Practical implicationsThe Regulation supplements certain elements of the Directive and contains implementing rules that will have direct effect in EU member states on application without the need for national implementing legislation. By discussing some of the highlights of the Regulation, the article will help fund managers and investors gain a better perspective of the AIFMD, which is useful from both a compliance and business planning standpoint.Originality/valueThis piece is of value to those private equity fund managers and investors looking for guidance as to how to digest the Regulation and the implications of these new measures on their respective businesses, as well as the investment marketplace as a whole moving forward.

PurposeThe purpose of this paper is to examine how board compensation and holdings are related to mutual fund expense ratios. Previous studies find that compensation and expense ratios are positively correlated and argue that this relationship is potential evidence of rent sharing, whereby excessively compensated boards fail to negotiate with fund managers for lower shareholder fees.Design/methodology/approachUsing a dataset of US open‐end mutual funds, the author examines how geographic‐based salary data, director profession, director fund holdings and fund returns might explain the relationship between compensation and fees.FindingsThe results provide additional support for potential rent sharing between fund managers and directors and are robust to alternative measures of director compensation, fund sales loads, director holdings and fund returns.Research limitations/implicationsThe findings are limited by the sample size and the lack of time series data of the hand‐collected dataset. Data are collected from 598 funds in the year 2003.Practical implicationsThese findings suggest that mutual fund expense ratios may be affected by potential agency costs.Social implicationsMutual fund regulatory focus has been predominantly focused on the independence of board chairmen, but this study shows that compensation may also be a significant contributor to fund governance.Originality/valueThis study is unique in its recent focus on fund expense ratios and board compensation and examining potential explanations for this relationship.

Purpose – The purpose of this paper is to investigate whether mutual fund investors can make effective cash flow timing decisions and examine the sensitivity of these decisions to past fund performance using cash flow data at the individual fund level.Design/methodology/approach – This study examines performance persistence and investor timing ability of 200 domestic equity mutual funds in Taiwan between 1996 and 2009. In particular, a performance gap measuring the difference between dollar‐weighted average monthly returns and geometric average monthly returns is used to evaluate investors' timing ability.Findings – The empirical results show that funds that have performed well (poorly) in the previous year tend to continue performing well (poorly) in the following year, and investors' timing performance is negatively related to fund performance. The results also show that investors' timing performance is significantly and negatively related to fund size, length of fund history, and momentum‐style of fund...

PurposeUnder its “Members Investment Scheme” strategic initiative, the Malaysian Employees Provident Fund (EPF) permits its members to invest part of their retirement savings in approved external funds. Given there is an increasing number of unit trust funds available in the market, it is not an easy task for members to make this investment choice decision. The purpose of this paper is to explore the perceived importance of fund selection criteria within the context of retirement savings in Malaysia. In addition, it also seeks to examine whether there is a relationship between religious affiliation and choice of fund.Design/methodology/approachA questionnaire‐survey was carried out among 440 individual EPF members.FindingsThe survey results show that the ranking of mutual fund selection criteria differs between Muslim and non‐Muslim members. Past performance was the most important criterion valued by the non‐Muslim EPF members. In line with conforming to religious belief, the fund's commitment to Islamic principles was the most important criterion considered by Muslim EPF members. Both type of religious group members also considered the overall reputation of the fund as important criterion in selecting a mutual fund.Research limitations/implicationsThe paper is subject to the normal limitations associated with survey research.Practical implicationsThe findings of this study can help fund management companies to better promote their funds to the right investors.Originality/valueThe paper provides empirical evidence regarding mutual fund selection criteria from the perspectives of individual investors.

Purpose – The purpose of this paper is to investigate the return performance of different investment strategies in the hedge fund sector, with a particular emphasis on the recent US financial crisis of 2007‐2010. Additionally, the paper aims to investigate the comovement of hedge fund index returns.Design/methodology/approach – The paper identifies broad hedge fund investment strategies using data from the Dow Jones Credit Suisse Hedge Fund Database. It examines the return comovement using the cross‐sectional volatility, covariance, and correlation metrics proposed in Adrian (2007). In addition, the paper examines whether correlations and covariance are important determinants of future volatility via traditional time‐series regressions.Findings – The paper finds that the majority of the broad hedge fund investment strategies incurred record level losses and gains during the 2007‐2010 period. In addition, it finds that the crisis period was preceded by high correlations, attributed primarily to a rise in c...

PurposeThe purpose of this paper is to examine the ability of well known fund characteristics such as the recent past performance, fund size, management fees, fund age, net asset value and fund growth so as to explain Tunisian equity mutual fund performance.Design/methodology/approachThe sample was split according to investment objectives, and the advanced dynamic panel data approach was used over the period 1999‐2006.FindingsThe authors find that past performance and fund size have a positive and significant influence on future performance for all fund categories, irrespective of what performance measure was used. This may indicate the existence of scale economies in the Tunisian equity mutual fund industry. The author also find that the other fund characteristics play an important role in explaining performance, but their impact varies among the fund categories. In all, regression results support the dynamic links between fund characteristics and future performance.Research limitations/implicationsThe findings do not take into account the behaviour of fund managers and their ability to extend the investment opportunities set. It seems that there are more complex factors related to the strategic behaviour of the manager and driving differences in performance across funds than previous studies have indicated.Practical implicationsThe authors confirm the empirical evidence that historical performance contains some information about future performance and such information may be important to mutual fund investors. It was also found that fund size is positively related to future performance of small fund category as well as of large fund category. This may indicate the existence of scale economies in the Tunisian equity mutual fund industry. In addition, the influence of the other control variables varies among the fund categories, but often is the same as in earlier studies.Social implicationsThe paper provides information to foreign investors for investing in Tunisian capital market.Originality/valueIn this regard, the study of literature revealed that the explanation of performance, based on quantitative factors, is often limited to a static approach that involves making estimates resting on multiple regression, regression in cross section and principal component analysis for short periods. However, several empirical studies highlight the impact of past performance on future performance. It seemed essential to enrich the analysis by using a dynamic approach.

PurposeThe purpose of this paper is to provide further understanding of the financial capability of mutual fund investors, and compare internet and branch office investors. It seeks to examine mutual fund investors' abilities and awareness of the terms and risks of mutual fund investments using a novel measurement instrument.Design/methodology/approachAbility measurement techniques adapted from educational and psychological studies were applied in the paper. Empirical survey data were collected in Finland.FindingsThere were differences between different types of investors in terms of financial knowledge. The channel used by the investors in making investments differentiated the more knowledgeable internet investors from the less knowledgeable branch office investors.Research limitations/implicationsThe subjects of the study are the clients of a mutual fund company. Future research could concentrate on examining the consequences of financial knowledge. One interesting question is how the consumers understand their personal financial capability and its role in their lives.Practical implicationsThe measures and indicators of financial capability are important evaluative instruments for banks and financial corporations as well as for the authorities involved in evaluating investors' financial behaviour.Originality/valueThe ability measurement technique adapted from education and psychological research proved to be applicable in the field of financial capability measurement.

PurposeThe purpose of this paper is to examine market concentration, economies of scale, economies of scope, and the relative size of a particular fund, within a fund family, as determinants of mutual‐fund expense ratio. This examination is focused at the asset‐manager level and is based on the Morningstar equity and fixed‐income style classifications.Design/methodology/approachAll data used in this study come from the July Morningstar Principia database for the years 1997 through 2006. One challenge of working with these data is that Morningstar treats each separate class of a fund as though it were an individual fund. As a result all Morningstar data items are reported for each fund class as though they are data items for a separate fund. The data are modified so that the items for separate classes of a fund are merged into data for a single fund. For example, assets in a fund become the total of the assets in each class of the fund.FindingsThis study contributes to the literature on mutual‐fund managers, and the literature on the structure of mutual funds, by showing that market concentration at the asset‐manager level varies substantially across Morningstar styles, particularly for the fixed‐income funds. The paper shows that increased market concentration is associated with greater expenses for the funds under management, within a given Morningstar‐style box, for both equity funds and for fixed‐income funds. We also show that increased costs are partially offset by economies of scope for the fixed‐income funds.Originality/valueThis paper extends the current literature in several ways. First, it confirms the existence of economies of scale at the fund level within Morningstar style classifications. Second, it documents the existence of varying levels of market concentration within different Morningstar style classifications. Third, the results demonstrate that there is a negative relation between the scope of funds handled across the Morningstar classifications by a particular fund manager and the expense ratio for particular funds. Finally, the results presented in this paper show that the largest funds within a family are associated with the highest expense ratios in the family.

PurposeThe purpose of this paper is to explain the results of a June 18, 2009 Joint US Department of Labor‐Securities and Exchange Commission hearing regarding Target Funds as investment options for individual and company‐sponsored retirement plans.Design/methodology/approachThe paper explains the background of Target Funds, the meaning of “target” dates and “glide paths,” the popularity of Target Funds with investors, recent losses suffered by Target Funds, areas of confusion among investors and plan sponsors such as fund naming conventions and differing target date strategies, asset allocation strategies, and glide paths; improvements in disclosure that are needed; possible problems with proprietary funds; and the prospects for new SEC and DOL regulations.FindingsGiven the extensive use of Target Funds as an investment option in retirement plans, particularly as a safe harbor “default” option, the SEC and DOL are expected to promulgate regulations governing some aspects of Target Funds, in order to protect investors by providing greater disclosure, especially regarding the glide path.Originality/valueThe paper provides practical guidance by experienced employee benefits, executive compensation, financial services and private funds lawyers.

PurposeThe purpose of this paper is to examine SEC rule amendments that permit a mutual fund to use a three‐ or four‐page “summary prospectus” to satisfy statutory prospectus delivery obligations and amendments to a fund's statutory prospectus requirements that require key information in a standardized order at the front of the document.Design/methodology/approachThe approach is to explain the SEC's regulatory changes to the basic mutual fund disclosure documents designed to help investors choose among the more than 8,000 mutual funds.FindingsThe investing public's use of the internet for fund research and fund transactions has made it possible for the SEC to take a “layered” approach to disclosure documents, providing an investor with a short‐form document and making available more detailed information on fund web sites. The SEC will likely follow suit with other documents and updated compliance requirements.Originality/valueThe paper will assist fund legal counsel and compliance professionals: to comply with the new statutory prospectus requirements; and to determine whether the summary prospectus is an appropriate disclosure document for a particular fund.

Purpose – The purpose of this paper is to examine the value of active fund management using a sample of hybrid mutual funds.Design/methodology/approach – Instead of using traditional risk‐adjusted measures, the paper employs an alternative attribution return methodology where the actual monthly fund return is compared to the return that would have been earned by the indexing strategy that best reflects the fund's prior month allocation. Value is measured by defining a fund's attribution return as the difference between a fund's actual month t return and the return that would have been generated in month t by the indexing strategy that most closely approximates the fund's month t−1 portfolio allocation.Findings – It is found that hybrid funds as a group do not add value and that this underperformance does not appear to be driven by the poor performance of non‐surviving funds. However, these funds perform significantly better than the style benchmark under weak vs strong stock market conditions. This perfor...

PurposeThis paper tries to find how investors evaluate mutual fund performance, not only based on both quantitative but also qualitative criteria.Design/methodology/approachThis paper adopts the modified Delphi method and the analytical hierarchy process (AHP) to design an assessment method for evaluating mutual fund performance.FindingsThe most important criteria of mutual fund performance should be “mutual fund style,” following is “market investment environment.” This result indicates investors' focus when they evaluate the mutual fund performance.Research limitations/implicationsThe AHP assumes the criteria are independent between each other. However, in many real cases, the criteria to evaluate the funds' performance may not be independent. Therefore, the authors recommend correlation between each criterion can be considered in the future research.Practical implicationsWhen making investment decisions, investors should be more concentrate on gathering information of mutual fund style. As for mutual fund issuers, they could also leverage these results to communicate with their clients in more efficient way.Originality/valueThis study presents a framework of assessable mutual fund performance where the AHP were employed for finding the both tangible and intangible key criteria of performance evaluation.

PurposeThe purpose of this paper is to explain the risk of bad mutual fund data for a financial services firm that sells mutual funds and to recommend steps a firm can take to ensure the reliability of its mutual fund data.Design/methodology/approachExplains problems caused by missing data, including the “breakpoint issue,” the best sources of mutual fund information, problems firms have retrieving and compiling that information, and weaknesses in a free service (the “Service”) provided by a well known industry utility and securities depository that related to coverage, completeness, and cost. Recommends seven actionable steps a firm can take to ensure the accuracy of its mutual fund data.FindingsFirms offering funds may sell billions of dollars of funds every week, and maintain considerably more on their books, but frequently they pay scant attention to the accuracy of their mutual fund reference data. The breakpoint issue is alive and well today, and would seriously erode investor and regulatory confidence if this fact became better known. For many firms, discrepancies in data result from funds having one policy disclosed to the SEC while their distributors use entirely different ones. Firms now realize that ensuring accurate reference data is no longer an issue that can be avoided.Practical implicationsRather than operating under the false assumption that critical data is accurate, make sure you dedicate the time to examine your organization's use of mutual fund data to ensure efficient, ongoing investor relations and to ensure the overall reputation of your firm.Originality/valueProfessional advice from an experienced vendor of compliance systems and software.

PurposeThis study sets out to examine whether small and mid‐cap fund performance is related to fund manager human capital characteristics including tenure, investment experience, education (MBA designation), professional training (CFA), and gender.Design/methodology/approachBased on a sample of 1,004 small and mid‐cap equity funds identified on the Morningstar database as of 31 December 2005, several statistical tests were applied which consider fund performance, risk, expenses, and turnover simultaneously.FindingsDepending on the benchmark, an optimal size of managed mutual funds is determined that ranges between $US1.43 billion and $US3.89 billion.Originality/valueThe results suggest that there are some systematic cross‐sectional differences in fund performance that can be attributed to differences in managerial human capital characteristics.

PurposeThe paper aims to examine the effect of advertising on mutual fund cash flows in the Finnish fund market.Design/methodology/approachThe paper's unique data set allows the observation of the effects of monetary advertising spending and the choice of advertising media.FindingsThe paper finds that neither past year's performance nor advertising alone is sufficient to produce increased cash flows. However, advertising together with past performance is found to significantly affect cash flows. The positive effect of advertising is limited to the use of non‐perishable advertising media. Additionally, it is found that fund families spending proportionately more on advertising receive higher asset flows.Originality/valueThe data are unique in that they can identify fund families that advertise, and also how much they spent on advertising in a given year and the dollar amount spent on five different media types. Obviously, having also fund level data available would enable more thorough analysis.

PurposeTo describe the broad range of reform initiatives that has been undertaken in response to a series of mutual fund scandals that have become apparent starting in 2003. This is the second of a two‐part article. The first part, in Volume 7, Number 1, is a chronology of developments related to the fund scandals since 1 January 2003.Design/methodology/approachDescribes SEC reforms, including governance reforms; compliance reforms; SEC‐directed expanded disclosure regarding fund expenses and costs; reforms with respect to share distribution practices; reforms addressing market timing, selective disclosure, and fair value pricing; other reform initiatives including codes of ethics for investment advisers and a requirement that hedge fund advisers register with the SEC; an enhanced surveillance and inspection program for mutual funds; and enforcement activities. Describes private civil suits brought against fund companies, legislative proposals, the roles of NASD and New York State Attorney General Eliot Spitzer, the development of “best practices” guides by industry groups, and measures being promoted by institutional investors.FindingsA broad range of reform initiatives has been undertaken by the SEC; NASD; and the New York, Massachusetts, and California Attorneys General. Both the US House of Representatives and the Senate have held hearings and proposed legislation, which at the moment appears dormant. Independent directors of only one mutual fund have been implicated in the trading abuse scandals. Hundreds of private civil lawsuits have been brought by fund shareholders against fund groups but virtually none has resulted in substantial restitution to plaintiffs.Originality/valueA detailed and comprehensive analysis of reform initiatives in response to mutual fund scandals since 2003.

PurposeThe purpose of this paper is to study the asset allocation problem for a pension fund which maximizes the expected present value of its wealth augmented by the prospective mathematical reserve at the death time of a representative member.Design/methodology/approachThe paper applies the stochastic optimization technique in continuous time. In order to present an explicit solution it considers the case of both deterministic interest rate and market price of risk.FindingsThe paper demonstrates that the optimal portfolio is always less risky than the Merton's (1969‐1971) one. In particular, the asset allocation is less and less risky until the pension date while, after retirement of the fund's representative member, it becomes riskier and riskier.Practical implicationsThe paper shows the best way for managing a pension fund portfolio during both the accumulation and the decumulation phases.Originality/valueThe paper fills a gap in the optimal portfolio literature about the joint analysis of both the actuarial and the financial framework. In particular, it shows that the actuarial part strongly affects the behaviour of the optimal asset allocation.

Purpose – Finance theory proposes that consumers require information about the risk‐return trade‐off credibility information to relieve principal‐agent conflict concerns, and transaction cost information – for investment decisions. This paper aims to investigate whether or not such information is present in advertisements for one investment vehicle – mutual funds.Design/methodology/approach – All advertisements in Barron's and Money over two years were content‐analysed to determine the degree to which mutual fund advertising practice adheres to theories regarding information necessary for optimal investment decisions. Use of techniques known to influence advertisement noting (i.e. advertisement size and colour) and copy readership (i.e. visual size, text length, unique selling proposition/brand‐differentiating message, celebrity endorsements, direct or indirect comparisons with competitors, and emotional appeals) was also investigated. Finally, because mutual funds are a financial service, the presence of...

PurposeThe purpose of this article is to explore what the author believes to be some of the key challenges facing hedge fund managers that are preparing for registration with the Commission under the Investment Advisers Act of 1940 (“Advisers Act”).Design/methodology/approachDiscusses marketing issues, including promotional use of track records from predecessor firms, use of target returns, use of selected investment performance, explicit or implicit promises of low volatility, and promises of specific fund characteristics. Discusses protection and proper use of fund assets, including asset safeguarding policies and procedures, and allocating expenses to funds. Discusses managing material, non‐public information; valuation of fund assets; side letters; and compliance program requirements.FindingsThe impacts of the new requirements will be significant for many hedge fund managers. Unregistered hedge fund managers will soon become subject to the full scope of the Advisers Act, including detailed compliance program requirements, obligations, and restrictions with respect to marketing, affiliated transaction prohibitions and restrictions, custody requirements, books and records creation and retention obligations, and a broad array of other standard and situational requirements. The organizations that meet these challenges successfully will be those that understand their risk profiles, foster top‐down “cultures of compliance,” and dedicate sufficient human and other resources to develop appropriate compliance programs and to monitor and continuously evaluate their exposures to potential compliance issues.Originality/valueProvides a useful discussion of what the author believes to be some of the most important regulatory concerns and challenges faced by hedge fund advisers as they prepare for a new regulated environment.

PurposeTo emphasize the need for financial services companies such mutual funds and brokerage houses to establish internal controls and related procedures for identifying potential conflicts of interest.Design/methodology/approachReviews government investigations into scandals involving the mutual fund industry over the past two years, including late trading, marketing timing, revenue sharing, directed brokerage, and gift‐giving; notes that criminal prosecution in this area is infrequent but still possible; and recommends, given the current landscape, that financial services companies examine their procedures for identifying and eliminating conflicts of interest.FindingsConcludes that recent mutual fund scandals have changed the regulatory landscape and the regulators, and in some cases prosecutors, are committed to aggressively pursuing any possible impropriety or conflict of interest between mutual fund advisors and the investing public.Originality/valueProvides a useful review of recent mutual fund scandals for the purpose of demonstrating to fund managers and directors why they should review their controls and related procedures to identify and eliminate conflicts of interest.

PurposeThe purpose of this paper is to explain the meaning and impact of the US Securities and Exchange Commission's (SEC) December 10, 2012 enforcement action against former mutual fund directors for failing to properly oversee the valuation of mutual fund portfolio securities.Design/methodology/approachThe paper provides an overview of the obligations of a board of directors with respect to the process used by a mutual fund to fair value portfolio securities that do not have reliable market prices, explains the background, factual circumstances and allegations set forth in the SEC enforcement order and emphasizes certain allegations made by the SEC that should cause mutual fund directors, investment advisers and compliance officers to review and refine certain aspects of the asset valuation policies and governance structure used in their mutual fund complex.FindingsThe SEC continues to prioritize mutual fund asset valuation enforcement actions. The SEC is willing and able to enter the board room to bring cases against independent directors, a path it has rarely taken in the past. While the facts underlying this enforcement action were extreme, mutual fund directors, compliance personnel and investment professionals should take immediate steps to review their asset valuation policies and related aspects of their governance structure to ensure that they comply with current rules, regulations, agency interpretations and accounting pronouncements, as well as best practices in the mutual fund industry.Originality/valueThe paper provides expert guidance from experienced investment management lawyers.

Explains the popularity of hedge funds as a convenient way to park pension fund and endowment fund money onshore or offshore in times of volatile stock and bond markets; as a result, hedge fund assets have risen to almost $650 billion. Relates this to why they are vulnerable to scams: they are largely unregulated and operate in secrecy, as the proprietary investment strategies of the manager cannot be revealed because of the added value they bring to the fund. Asks where the auditors were in cases of abuse, and gives examples of billion dollar frauds. Recommends measures to minimise risk of hedge fund fraud: put managers and staff under scrutiny for criminal convictions, perform due diligence and background tests, ensure proper audits, and meet with current fund clients.

Every month, many hedge fund managers grapple with a fundamental conflict of interest. The conflict arises when a fund manager, whose compensation is based on fund performance, is charged with determining the value of the complex or illiquid securities in his portfolio. These securities often do not receive reliable market quotes, and may be difficult to value. Accordingly, a fund manager may be tempted to misprice the hard‐to‐price names in his account in order to bolster fund performance, and increase his own compensation. The situation is somewhat analogous to a chief financial officer calculating his corporation’s profits, all the while knowing that his calculations will affect his bonus. Change, however, is on the horizon. On December 2, 2004, the United States Securities and Exchange Commission (“SEC” or “Commission)” amended the Investment Advisers Act of 1940 (“Advisers Act)” to require certain hedge fund advisers to register with the Commission (the “Rule)”. Under the Rule, registered hedge fund advisers will be required to make their books available to SEC examiners by February 1, 2006, and, in turn, subject their valuation methods and policies to regulatory scrutiny.

Ethical investment funds are retail financial products which explicitly add social or ethical goals or constraints to normal financial criteria in selecting their underlying share portfolio. By means of a case study of a UK fund, this paper explores how the relationship between ethical criteria and financial performance might be handled, which is one of the critical issues that arise in putting ethical investment into practice. The research confirms perceptions of a tension between the implementation of an ethical policy and the achievement of good financial performance, and it identifies some of the ways which fund managers might seek to cope with that tension. However, by studying the financial management of an ethical fund in practice, the paper also reveals the ways in which there might be a positive correlation between the financial performance and the ethical effectiveness of a fund, thus providing a complementary perspective to the earlier empirical studies and discussions which have focused on the possibility of ethical concerns undermining financial success.

A mutual fund must provide prospectuses to each potential investor before the fund may accept monies from that individual. The prospectuses are a major source of information about the fund and yet they have historically been largely unreadable by the public. While the poor readability has been a problem in the past, it is becoming a greater problem as the number of individuals responsible for their own investment decision making increases. Recognising this problem, the Securities and Exchange Commission (SEC) adopted Rule 421 in 1998, requiring that prospectuses be made more readable as measured by a subjective reading of the document. This study applies four objective tests to mutual fund prospectuses from both preand post‐Rule 421 periods and finds substantial evidence that mutual fund companies have complied with Rule 421 and are producing prospectuses that are much more readable and accessible by the general public.

PurposeThis paper seeks to explain recently published guidance from the Securities and Exchange Commission clarifying the responsibilities of mutual fund directors when they make the determinations required by Rule 10f‐3 (permitting a fund to purchase securities from an affiliated syndicate), Rule 17a‐7 (permitting a fund to engage in certain cross‐trading) and Rule 17e‐1 (permitting a fund to use an affiliated broker).Design/methodology/approachThe paper explains guidance that was delivered in the form of a letter to the Independent Directors Council and the Mutual Fund Directors Forum.FindingsAmong other things, the Rules require that the board of a fund that relies on the Rules should undertake quarterly reviews and make certain determinations related to the potential conflicts of interest present. The guidance explains various ways in which a fund board may meet its responsibilities under the Rules, including review of each transaction, compliance officer summaries, and information from other experts. The guidance emphasizes fund boards' ultimate responsibility for making quarterly determinations required by the rules and the importance of meaningful dialogue in boards' evaluation of affiliated transactions.Originality/valueThe paper provides practical guidance from experienced securities lawyers.

Outlines the models devised by Jensen (1968, 1969) and Treynor and Mazuy (1966) for measuring the performance of managed portfolios and related empirical research. Applies the Treynor‐Mazuy model to a sample of 17 Greek equity mutual funds using 1995‐1998 daily returns data and presents the results, which show no evidence that fund managers can select the right market timing or (except for four) undervalued securities.

Suggests the reorganizations of the international monetary fund, re‐directing its path towards conditions of stable equilibrium. Discusses basic deficiencies of the Bretton Woods Agreement of 1944 which set out the purposes of the internaitonal monetary fund. Suggests basic conditions for stable equilibrium at the international level, before making recommendations for a new sounder foundation of the international monetary fund in relation to its administration, the prerogatives and rules of functioning of its monetary department, an exension of monetization of other suitable commodities to serve as international liquidity reserves, and the fund’s banking department.

Risk allocation as currently practiced in pension funds is typically characterized by: 1) measurement of the risk of returns relative to a benchmark, and 2) the assignment of asset class and profit center limits on potential losses that remain within the fund's overall risk appetite, yet do not excessively hinder achievement of performance targets. Recently, there has been an increased effort to make risk allocation more proactive, i.e., to use risk allocation as a tool for adding value, rather than simply as part of a monitoring or “warning flag” system (see “Covering Bases” [1998, p. 45] and Hemmerick [1998, p. 1]). The underlying notion is that allocated risk capital can improve performance when viewed as a target, rather than a limit, if the goal of the fund is to maximize returns, or, specifically, to maximize expected surplus growth aggregated across the fund, for a given total value at risk (VaR) of returns relative to the benchmark.

PurposeThis paper seeks to discuss the Guidance Note on disclosure of hedge fund side letters issued by the UK's Alternative Investment Management Association (AIMA) in September 2006.Design/methodology/approachExplains the meaning of “material” and “non‐material” and recommends immediate actions and ongoing disclosure policies for funds and fund managers.FindingsGenerally, it is more appropriate for disclosure to come from the fund than the fund manager. The manager has a degree of discretion as to what constitutes a “material” term. The new FSA approach does not prohibit the use of side letters.Originality/valueAn interpretation of the Guidance that will help fund managers fine‐tune their policies on use of side letters and disclosure of terms in those letters.

The purpose of this paper is to demonstrate how probabilistic simulation can be used to assist prospective general partners (GP) and limited partners (LP) of a venture capital limited partnership fund to evaluate alternative investment strategies for the proposed fund. The model presented in the paper is based upon observed characteristics of the venture capital market reported in the finance, economics, and management science literature. The body of the paper is organized as follows. In Section II we review the structural characteristics of the model. In Section III we present the results, in terms of ending wealth, obtained from simulating the fund's operations over its life under selected alternative investment strategies. In Section IV we show evaluations of the fund's simulated results under expected return, mean/variance and four moment approaches. In Section V, we present conclusions and implications of the results for financial management.

Scope of the Fund. It is as well to clarify at the beginning that contrary to what the name European Social Fund may imply to some readers, the Fund does not cover the whole range of expenditure facing the European Community in the field of social policy. Nor is it, to counter another widespread misconception, a Fund empowered to step in to meet every kind of social need in cases where other resources, public and private, may be inadequate.