Sitting Bucks: Zero Returns in Fixed Income Funds
85 Pages Posted: 23 Sep 2018 Last revised: 25 Feb 2020
Date Written: February 24, 2020
Zero returns are widely prevalent in fixed-income funds: on more than 30% of trading days, net asset values (NAVs) do not change. A principal driver of this phenomenon is the high illiquidity of funds’ holdings, and further evidence hints at a strategic unwillingness on the part of these funds to immediately reflect losses. Consequently, fund NAVs are extremely stale, making fund returns highly predictable at daily, weekly, and even monthly horizons. Investors respond by withdrawing capital from overvalued funds, exacerbating the risk of fund runs, while buy-and-hold investors face annual dilution costs of around $3 billion when others opportunistically buy and sell at incorrect prices. Our results highlight worsening consequences of insufficient fair-valuation practices even after the corrective regulations that followed the 2003 market-timing scandal.
Keywords: Fixed income mutual funds, Stale prices, Fund flows, Fund runs
JEL Classification: G11, G14, G23
Suggested Citation: Suggested Citation