Inferring Mutual Fund Quality At Inception

38 Pages Posted: 30 Aug 2016 Last revised: 27 Nov 2017

See all articles by Oleg Chuprinin

Oleg Chuprinin

UNSW; Financial Research Network (FIRN)

Thomas Ruf

University of New South Wales (UNSW)

Date Written: November 27, 2017

Abstract

We show that poor mutual fund performance can result from agency problems that drive fund inceptions. Funds created to exploit investor irrationality have different portfolio compositions at inception, loading heavily on past winner stocks. Investors reward these funds with abnormally high inflows but only until the fund accumulates a performance history of sufficient length. Funds then rebalance their portfolios away from winner stocks incurring abnormally high turnover. Higher tilt towards winners at inception predicts fund underperformance for up to eight years. These results suggest that portfolios of young funds contain valuable information about the motives behind the fund’s initiation. Agency-driven initiations can explain proliferation of inferior funds.

Keywords: Mutual fund inception, Performance predictability, Window-dressing, agency problems

JEL Classification: G11, G23

Suggested Citation

Chuprinin, Oleg and Ruf, Thomas, Inferring Mutual Fund Quality At Inception (November 27, 2017). Available at SSRN: https://ssrn.com/abstract=2831285 or http://dx.doi.org/10.2139/ssrn.2831285

Oleg Chuprinin (Contact Author)

UNSW ( email )

Room 349, UNSW Business School
High St
UNSW Sydney, NSW 2052
Australia
406674419 (Phone)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

Thomas Ruf

University of New South Wales (UNSW) ( email )

Kensington
High St
Sydney, NSW 2052
Australia

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