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Prospectus – September 2012 JPMorgan Investment Funds
Our first investor, the dogmatist, has extreme prior beliefs about the potential for manager skill. The dogmatist rules out any potential for skill, either fixed or time varying, for any fund manager. That is, the dogmatist’s view is that ai0 is fixed at 1 12ðexpense þ 0:01 turnoverÞ and that ai1 is fixed at zero, where expense and turnover are the fund’s reported annual expense ratio and turnover, and where we assume a round-trip total trade cost of 1% (this prior specification is similar to Pastor and Stambaugh (2002a,b)). The dogmatist believes that a fund manager provides no performance through benchmark timing or stock selection skills, and...
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Investigating Underperformance by Mutual Fund Portfolios
We consider two types of dogmatists. The first is a ‘‘no-predictability dogmatist (ND),’’ who rules out predictability, additionally setting the parameters bi1 and Af in Eqs. (1) and (2) equal to zero. The second is a ‘‘predictability dogmatist (PD),’’ who believes that mutual fund returns are predictable based on observable business cycle variables. We further partition our PD investor into two types: PD-1, who believes that fund risk loadings are predictable (i.e., bi1 is potentially nonzero), and PD-2, who believes that both risk loadings and benchmark returns are predictable (i.e., bi1 and Af are both allowed to be nonzero). Note that our PD investors believe that asset...
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Unobserved Actions of Mutual Funds
Our sample contains a total of 1301 open-end, no-load U.S. domestic equity mutual funds, which include actively managed funds, index funds, sector funds, and ETFs (exchange traded funds). Monthly net returns, as well as annual turnover and expense ratios for the funds, are obtained from the Center for Research in Security Prices (CRSP) mutual fund database over the sample period January 1975–December 2002. Additional data on fund investment objectives are obtained from the Thomson/CDA Spectrum files. In Appendix A, we provide both the process for determining whether a fund is a domestic equity fund as well as a description of the characteristics of our investable equity funds....
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Flow of Funds Accounts of the United States
Instruments used to predict future mutual fund returns include the aggregate dividend yield, the default spread, the term spread, and the yield on the three-month T-bill, variables identified by Keim and Stambaugh (1986) and Fama and French (1989) as important in predicting U.S. equity returns. The dividend yield is the total cash dividends on the value- weighted CRSP index over the previous 12 months divided by the current level of the index. The default spread is the yield differential between Moodys BAA-rated and AAA- rated bonds. The term spread is the yield differential between Treasury bonds with more than ten years to maturity and T-bills that mature...
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European Responsible Investing Fund Survey
Next, we examine predictability in both benchmark returns and fund risk loadings. Consider the dogmatist who believes in such a predictability structure (PD-2). This investor would experience a nontrivial utility loss of 15.1 basis points per month (1.8%/ year) in December 2002 if forced to hold the optimal portfolio of the ND. The utility loss is even larger over the course of all 276 monthly investments. This loss averages 21.1 (39) basis points per month over expansions (recessions). Moreover, the optimal portfolio of the PD-2 investor consists of very different mutual funds, relative to those optimally selected by investors who disallow predictability or who allow predictability only in...
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Reporting by Investment Advisers to Private Funds and Certain Commodity Pool Operators and Commodity Trading Advisors on Form PF
Indeed, in the presence of predictability in fund risk loadings and benchmark returns, optimal portfolios consist entirely of actively managed funds even when the possibility of manager skills in stock selection and benchmark timing is ruled out. That is, actively managed funds allow the investor to capitalize on predictability in benchmarks and fund risk loadings in a way that cannot be achieved through long-only index fund positions. We now turn to analyze predictability in manager skills. Incorporating such predictability results in asset allocation that is overwhelmingly different from the other cases examined. To illustrate, consider the agnostic who believes in predictable skills (PA- 3). This investor faces an enormous...
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Investment Funds in Turkey
Here, we analyze the ex post, out-of-sample performance of various portfolios strategies through a sequence of investments with monthly rebalancing. Optimal portfolios are derived first using the initial 60 monthly observations, then using the first 61 monthly observations, and so on, ... ; and are finally rebalanced using the first T 1 monthly observations, with T ¼ 336 denoting the sample size. Hence, the first investment is made at the end of December 1979, the second at the end of January 1980, and so on, ... ; with the last at the end of November 2002. We obtain the month-t realized excess return on each investment...
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The Client is King: Do Mutual Fund Relationships Bias Analyst Recommendations?
This is a good time for a review of the academic literature on evaluating portfolio performance, concentrating on professionally managed invest- ment portfolios. While the literature goes back to before the 1960s, recent years have witnessed an explosion of new methods for perfor- mance evaluation and new evidence on the subject. We think that several forces have contributed to this renaissance. The demand for research on managed portfolio performance increased as mutual funds and related investment vehicles became more important to investors in the 1980s and 1990s. During this period, equity investment became widely popular, as 401(k) and other defined-contribution investment plans began to dominate defined-benefit plans in the United...
8/30/2018 1:40:22 AM +00:00
STANFORD INSTITUTE FOR ECONOMIC POLICY RESEARCH
While the demand for research on investment performance has increased, the cost of producing this research has declined. Early studies relied on proprietary or expensive commercial databases for their fund performance figures, or researchers collected data by hand from published paper volumes. In 1997, the Center for Research in Security Prices introduced the CRSP mutual fund database, com- piled originally by Mark Carhart, into the academic research market. Starting in about 1994, several databases on hedge fund returns and characteristics became available to academic researchers. Of course, during the same period the costs of computing have declined dra- matically. In response to an increased demand and lower costs of production, the...
8/30/2018 1:40:22 AM +00:00
ISLAMIC INVESTMENT FUNDS: AN ANALYSIS OF RISKS AND RETURNS
Given that it is hard to believe mutual fund investors experience little over half the returns delivered by their funds, let us illustrate the above phenomenon with a hypothetical example: In Year 1, mutual fund Red Hot is small, has 10,000 shareholders, and returns 35%. As a result of its good performance, Red Hot attracts new money and, in Year 2, has 50,000 shareholders. As a consequence of its larger size, however, the fund delivers only 5% in Year 2....
8/30/2018 1:40:21 AM +00:00
Concept paper on proposed Alternative Investment Funds Regulations
The study covered mutual fund expense ratios (not including market impact costs) and the behavior of these ratios with respect to mutual fund complexes and individual product lines with various amounts of assets under management. In particular, the study covered all 533 mutual fund complexes that existed in the United States during the years 1990 to 1994, encompassing assets totaling about $2 trillion at the end of the period. A mutual fund complex is a sponsor which may offer anywhere from...
8/30/2018 1:40:21 AM +00:00
Volatility Metrics for Mutual Funds
With respect to equity mutual funds, the study further notes that funds are experiencing diseconomies of scale in their expense ratios when their size exceeds $600 million to $800 million. Interestingly, the foregoing study does not even address the problem of market impact costs which are clearly an even greater expense to mutual funds than are the more visible costs used in the calculation of their...
8/30/2018 1:40:21 AM +00:00
An Analysis of Berkshire Hathaway
Although the Standard & Poor's 500 is the most commonly used measure of the performance of the U. S. stock market, it is sometimes argued that, because this index is so heavily populated with high quality, large capitalization stocks, it may not be an appropriate benchmark with which to compare a mutual fund which may be invested in lower quality, smaller capitalization stocks. The obvious refutation: If one can obtain a higher return by investing in...
8/30/2018 1:40:21 AM +00:00
OECD Working Papers on Insurance and Private Pensions No. 15: Governance and Investment of Public Pension Reserve Funds in Selected OECD Countries
The fact that the shortfall figures have been rising over the past twenty years indicates that the mutual fund industry's market impact problems are becoming increasingly severe. This is not surprising, given the rapid growth in the size of mutual funds and an increase in the rates of their portfolio turnover. In any event, it appears that the combination of reported expenses and market impact costs, on average, now consumes the mutual fund investor's capital at a...
8/30/2018 1:40:21 AM +00:00
Fundamentals: Investment Company Institute Research In Brief - July 2000
Ondjiva, an Angolan town on the border with Namibia, often goes for years without significant rainfall. When it does rain, floods sweep across the flat ground leaving little stored for future use. Those who can afford to do so buy their water from tankers, spending on average one third of their monthly income. Others buy from men like Antonio - his barrel weighs nearly ¼ tonne, and it will have taken him much of the day to roll it into town, earning him around 20 pence. Many people can afford neither; meaning girls and women must spend time...
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UK Fast Start Climate Change Finance
We are aiming to create new partnerships with the private sector to increase green investments. The aim is to demonstrate to major private sector investors that climate friendly investments are financially viable. In particular we are working on two partnerships with the private sector for climate-friendly funds. We and other public sector players will consider investing in these funds alongside private pension and sovereign wealth funds. The funds will invest directly in renewable energy projects, and also in sub-funds to support investments in, for example: energy efficiency, renewable energy, clean tech inventions, forestry, public transport, urban development and waste treatment....
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MUTUAL FUND EFFICIENCY AND PERFORMANCE
Recognising that significant levels of investment are required to make the transition to a low carbon economy, the Capital Markets Climate Initiative (CMCI) was launched by the UK Minister of State for Climate Change, Gregory Barker, to help accelerate the response to this financing challenge by supporting the scale up of private finance flows to developing countries. The CMCI will be working with policymakers in developing countries to understand why and how public sector action can help mobilise private capital and encourage new markets in low carbon investments. This will focus on the role of “investment grade” policy, including public...
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Agricultural Investment Funds (AIFs)
Many countries around the world are partly prefunding their otherwise pay-as-you-go (PAYG) financed social security systems by establishing or further developing existing public pension reserve funds (PPRFs). Most OECD countries have put in place internal and external governance mechanisms and investment controls to ensure the sound management of these funds and better isolate them from undue political influence. These structures and mechanisms are in line with OECD standards of good pension fund governance and investment management. In particular, the requirements of accountability, suitability and transparency are broadly met by these reserve funds. However,...
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Fundamentals: INVESTMENT COMPANY INSTITUTE RESEARCH IN BRIEF
Professional investors often explicitly or implicitly claim to understand the fundamentals of finance theory. They may, for example, base allocation decisions on historical returns, volatility, correlations of returns across funds or asset classes, investment fees, industry outlooks, or various other financial metrics. Most 401(k) participants do not have access to much of that information or are poorly equipped to benefit from it. They may be guided by recent historical returns, which are typically readily available and understood, even if incorrectly so. Funds with higher returns understandably appear more attractive to investors. However, the finance literature...
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Pabrai Investment Funds
To date, most mutual fund performance evaluations have been fairly simplistic: how has a fund performed relative to “the market”? The Standard & Poor’s 500 Stock Index is usually used as a proxy for the market, despite the fact that it accounts for only about 70% of the capitalization of the U.S. stock market and is dominated by corporations with gigantic market capitalizations. (Its largest 25 stocks account, on average, for 1% of the entire market; the 6500 “non-500” stocks in the market have an average weight of 4/1000 of 1%.) But today, many funds resemble...
8/30/2018 1:40:21 AM +00:00
Fourteenth Meeting Of The IMF Committee On Balance Of Payments Statistics
Many governments acknowledge that environmental degradation and climate change pose international and trans-boundary risks to human populations, economies, and ecosystems that could result in a worsening of poverty, social tensions, and political stability. To confront these global challenges, countries have negotiated various international agreements to protect the environment, reduce pollution, conserve natural resources, and promote sustainable growth. While some observers call upon developed countries to take the lead in addressing these issues, efforts are unlikely to be sufficient without similar measures being implemented in developing countries. Developing countries, however, focused on poverty reduction and economic growth, do not have the...
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The Clean Technology Fund: Insights for Development and Climate Finance
The United States and other industrialized countries have committed to financial assistance for environmental initiatives through several multilateral agreements (e.g., the Montreal Protocol (1987), the United Nations Framework Convention on Climate Change (1992), United Nations Convention to Combat Desertification (1994), and the Copenhagen Accord (2009)). International financial assistance takes many forms, from fiscal transfers to market transactions, and includes foreign direct investment (FDI), bilateral overseas development assistance (ODA), and contributions to multilateral development banks (MDB) and other international financial institutions (IFI), as well as the offering of export credits, loan guarantees, insurance products, etc. ...
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Mutual Fund Basics Tutorial
With their high share of trading turnover, hedge funds play a critical role in providing liquidity for mis-priced assets, particularly when large volumes are traded in thin markets – thereby reducing volatility. This activity is particularly important, given the rapid growth in volume of new-generation structured products issued by investment banks. Hedge fund leverage estimated via an induction technique suggests a leverage ratio that must be above 3 (versus total AUM of USD 1.4 trillion). Gearing is required to boost returns where low risk and low return styles are implemented. Investment banks are well capitalised against hedge...
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Why are some mutual funds closed to new investors?
“Structured products” are one of the fastest growing areas in the financial services industry, and may already be over half of the notional size of the hedge fund industry (AUM plus leverage). These products, constructed by investment banks, are extremely complex using synthetic option replication techniques, and offering a variety of guarantees in returns. They are sold to retail, private banking and institutional clients. Hedge funds help reduce volatility risk for investment banks in supplying these products. ...
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MAKING MUTUAL FUNDS WORK FOR YOU
Investment banks have strong capital adequacy, in particular with respect to their hedge credit fund exposures – some estimates of which are provided below. Ironically, the fastest growing area of new financial products that utilise highly-complex derivative products exclusively lies mostly within the regulated sector. This is the market for “structured products” that are produced by investment banks and sold to retail, private bank and institutional clients. The strong volume growth in this area, particularly in Europe and Australasia, creates ex-ante derivative pricing pressure, and hedge funds frequently take the other side of the trades (reducing ex-post volatility). ...
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Journal of International Financial Markets, Institutions & Money
The size of this market is very roughly estimated to be around USD 3.8 trillion, already over half of the notional size of the hedge fund industry (AUM plus leverage), and growing quickly in the last two years. Structured products are passive in nature (unlike hedge fund active styles), and focus on providing returns (for different risk profiles of clients) with some element of capital guarantee. Constant proportion portfolio insurance (CPPI) is one of the popular new- generation techniques. These products have not been tested when major anomalies in volatility arise. They are highly exposed to downward price gaps in...
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Fees and Expenses of Mutual Funds, 2006
Hedge Funds have grown quickly over the past ten years, and are important part of the financial landscape. They are difficult to define as entities, because the line between what hedge funds do that other institutions do not is blurred – proprietary traders in investment banks, private equity funds, and fund managers all use extensive leverage and derivatives to trade markets or to shift risks. The definition of a hedge fund used here is as follows: lightly-regulated managers of private capital that use an active investment approach to play arbitrage opportunities that arise when mis-pricing of financial instruments...
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Mutual Funds and Institutional Accounts: A Comparison
The main differences between a hedge fund and a private equity fund are: (a) the private equity fund looks to use leverage to buy companies to obtain full management control for purposes of changing its structure operations, whereas a hedge fund trades assets without looking for full control; (b) the hedge fund covers a multitude of styles, only one small part of which might involve buying shares to force management to make value enhancing changes (activist); and (c) hedge funds often (but not always) have a shorter investment horizon than private equity firms. Overall, hedge funds...
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Portfolio Transactions Costs at U.S. Equity Mutual Funds*
The analysis in this paper suggests that hedge funds play a very positive role in financial markets by providing liquidity to thin markets where mis-priced financial instruments are to be found. This type of activity reduces volatility rather than increasing it. Indeed with the rapid growth of structured products in recent years, particularly in Europe and Asia, hedge funds have been quite critical in containing the volatility that might otherwise have arisen. Structured products are largely driven by investment banks, and have resulted in the proliferation of new and highly-complex derivative products (discussed below). Figure 1 shows...
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Risk-Adjusted Performance of Mutual Funds
A summary of the different styles of hedge funds and the proportion of the market they occupy is shown in Table 4, based on Hedge Fund Industry Research data. An indication of the broad activity involved in the style is shown on the right hand side. Most of these strategies are long-short in nature: all of the equity hedge (e.g. long a stock and long a put to hedge its fall); most of event driven (e.g. buy the target M&A company and sell the buyer); all of relative value arbitrage (e.g. buy the London listing and sell the...
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