Abstract: We uncover a reliable positive relation between a fund’s country rotation intensity and its subsequent performance across funds and over time. Funds that change their country allocations with the greatest intensity have an average annualized value added of $32 million per fund. A fund’s change of holdings in a country is associated with future outperformance in those holdings. The outperformance is concentrated on the downside when funds sell country holdings before subsequent poor country market returns and currency depreciation. High country rotation funds attract inflows only if they have superior past performance.
Discussant: Ella Patelli, University of British Columbia
Jaewon Choi, University of Illinois-Urbana-Champaign
Mathias Kronlund, University of Illinois-Urbana-Champaign
Jimmy Ji Yeol Oh, Sungkyunkwan University
Abstract: Mutual funds face risks of dilution from trading costs when investors place purchase or redemption orders. To deal with this risk, the SEC in 2018 started allowing U.S. mutual funds to change their net asset value (NAV) up or down by a prescribed amount in response to abnormally large flows—a practice known as swing pricing. However, no U.S. fund has thus far chosen to adopt this practice. This paper provides evidence that funds can employ an alternative way to change the value of their portfolios in response to flows, namely by changing the valuation of their underlying holdings. We refer to this phenomenon as “silent swing pricing,” as these swings in valuations are not announced and lack transparency, but still effectively achieve the same goal. Focusing on active fixed-income funds from mid-2008 to 2022, we find that a fund’s valuation gap of a particular bond relative to peer funds’ valuations is positively related to that fund’s same-day flows. The sensitivity of valuations to flows is greater when a fund experiences outflows than when it has inflows, and when it holds more illiquid securities. The extent of silent swing pricing is attenuated, however, by return smoothing incentives when funds have poor past performance and fragile investor base. We show this practice has persisted even after the 2018 SEC rule change.
Leonid Kogan, Massachusetts Institute of Technology
Wei Wu, Texas A&M University
Abstract: We develop a unique dataset, the first-ever of its kind, by leveraging the US Census Bureau’s LEHD program and various big textual data sources, to examine the factors influencing the compensation and career trajectories of US active equity mutual fund managers. We find that managers’ compensation is primarily determined by assets under management (AUM), with return performance directly influencing bonuses beyond its impact on AUM. Despite not aligning with client interests, fund flows significantly affect manager compensation and career outcomes. Large fund outflows increase a manager’s likelihood of job turnover (with a substantial decline in compensation) by 4 percentage points.
