45 Pages Posted: 18 Mar 2017 Last revised: 11 May 2017
Date Written: May 10, 2017
I document portfolio pumping at the fund family level. After 2002, when the SEC started to pay attention to portfolio pumping at the individual fund level, non-star fund managers began to buy stocks held by the star funds in the family to inflate portfolio values of the star funds at the year end. I find that mutual fund families find legal loopholes and employ portfolio pumping at the family level to inflate the performance of their star funds, so that they continue to exploit investors' performance-chasing behavior and spillover effect. Fund families tend to mark up small stocks, which are easier to manipulate. Moreover, non-star managers of the family pump the stocks buried deep down in the holdings of the family star funds, which draws less attention from regulators and investors. Furthermore, their pumping strategy is selective, so that other fund families do not enjoy the free ride of the inflated prices. Non-star fund managers who are active in pumping the portfolios of the star funds enjoy more future inflows. The monotonic relation between future inflows and the activeness in portfolio pumping at the family level is not due to investors' attention to the portfolio holdings of the star funds, but is more likely to be explained by the redirection of flows to the family to compensate the pumping managers. Non-star managers who are in the top quintile of pumping for the family receive 1.8% more inflows on average in the next quarter than the ones in the bottom quintile, conditional on the performance. The evidence of portfolio pumping at the family level is the strongest in the fourth quarter of the calendar year, when the mutual fund families have the greatest incentives to pump the portfolios of the star funds.
Keywords: Mutual Funds, Portfolio Pumping, Family Strategy
JEL Classification: G18, G23, G28, K22
Suggested Citation: Suggested Citation