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Transcript of Apoorva Javadekar - How Does Mutual Fund Reputation Affect Subsequent Fund Flows?
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How Does Mutual Fund Reputation Afect
Subsequent Fund Flows?
Apoorva Javadekar
Boston University
February 8, 2016
Apoorva Javadekar (Boston University) Reputation and Fund Flos February 8, 2016 1 ! "#
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$ntrodu%tion
Motivation I: Why Study Mutual Funds?
1
utual Funds: Important Vehicle of Investment
&ana'e 1 r *&utual +unds ons "0 U- e.uities /s 20 dire%t oldin's#6 o+ U- ouseold on utual +unds
2Understand Behavioral Patterns:
$nvestors learn about ana'erial ability trou' returns +und +los sed li't on learnin', in+oration pro%essin' %apa%itieset%
"Fund Flows Affect anagerial Risk
aking
30 +unds ana'ers paid as a o+ assets +lo patterns %an a++e%t risk takin'
ipa%ts on asset pri%esApoorva Javadekar (Boston University) Reputation and Fund Flos February 8, 2016 2 ! "#
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$ntrodu%tion
Motivation II: he !ape"
1!"isting #iterature:
-tudies link beteen +und per+oran%e and +und +los (+lo4s%edule)
Finds and rationali5es eviden%e o+ return chasing and convexity in +und+los
But not u% is knon about te iportan%e o+ per+oran%e istory(reputation)
2his Paper:
7plore te role o+ reputation +or +und +los
o istory up to t 1 a++e%t link beteen tie t per+oran%e andtie t 9 1 +los
:an e e7plain te eviden%e;
Apoorva Javadekar (Boston University) Reputation and Fund Flos February 8, 2016 " ! "#
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$ntrodu%tion
Role o# Reputation
Better understanding of managerial incentives:
i' reputation ettin' Fired) (?orana@ 1336, ?ostovetsky@2011)
$ sample:"0 o+ te +ired ana'ers belon' to botto 20
reputation rankBut %opensation too deterine te in%entives and +los a++e%t%opensation
$portant to kno o reputation a++e%t +los
But can reputation affect flows%
$nvestor etero'eneity investor %oposition is istory4spe%i+i%
subse.uent rea%tions to +und per+oran%e be%oe istory4spe%i+i%
Apoorva Javadekar (Boston University) Reputation and Fund Flos February 8, 2016 # ! "#
$ t d ti
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$ntrodu%tion
A$enda
piri%al viden%e
&odelestin' odelpredi%tions indata
ests to %e%kvalidity o+ odele%anis
Apoorva Javadekar (Boston University) Reputation and Fund Flos February 8, 2016 ! "#
$ t d ti
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$ntrodu%tion
%ite"atu"e Review
Return &hasing and flow conve"it$:$ppolito (1332), -irri u++ano (1338), :evallier llison (133)
#ack Performance Persistence:
:arart (133), Bollen Busse (200#) test sort and ediu terpersisten%e
Risk shifting due to conve" flows:
Bron, arlo, -tarks (1336), Basak (2012)
heoretical odels:
Berk & Green (2004): rationali5es la%k o+ persisten%e and return
%asin' siultaneously usin' de%reasin' returns and %opetitive %apitalsupplyLynch & Musto (2003): e7plains %onve7ity usin' ana'er repla%eent
Berk ' onks ()**+,: repeat losers ave insensitive +los tote le+t o+ +lo4s%edule
Apoorva Javadekar (Boston University) Reputation and Fund Flos February 8, 2016 6 ! "#
piri%al viden%e
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piri%al viden%e
&a"iables
Fund
Flows:
FL!i t C"it D"it1 (1 9 rit )E
it1 it" (1 9
r )ere rit denotes net o+ e7pense +und returns durin' tie t and
"itdenotes +und assets at te end o+ tie t
Fund Performance:
Ranks itin sae #invest$ent o%ective# based on ra net returns(-irri u++ano@ 1338)
Ranks based upon #'M*+pha# (Berk Binsber'en@ 201#)
Ranks are norali5ed to lie beteen D0, 1E interval
&urrent Performance (er,it ,: Based upon %urrent year t
Reputation (
reputeit,: Based upon year indo endin'
it %urrent ear t Apoorva Javadekar (Boston University) Reputation and Fund Flos February 8, 2016 ! "#
piri%al viden%e
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piri%al viden%e
Su''a"y Statistics
Reputation !"cess
LT!"p Front urn
LT-i.e Age
Ret
LTRatio #oad over n/ 0ears
#ow
Mean 400#2 400"8 001" 00"8 0886 0186 603"" 1268
Median 400#1 400" 001" 00#1 000 016 1220 12000 ed
Mean 4000" 40001 0012 00"8 01 012 1"2383 1""
Median 4000 4000# 0012 00#" 00 016 20800 12000
op
Mean 00#2 00#1 0012 00" 002 01 20133"1 1601#
Median 00"1 00"2 0012 00"8 020 010 "160 11000Full -ample
Mean 0000 0002 0012 00" 0#" 01 1"68062 102
Median 4000 40002 0012 00#2 00 0163 211# 12000
Apoorva Javadekar (Boston University) Reputation and Fund Flos February 8, 2016 8 ! "#
piri%al viden%e
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piri%al viden%e
(asic Re$"ession F"a'ewo")
FL!i t* 1
123ective:Asses ipa%t o+ reputation startin' at tie t on+lo4s%edule +or te period t 9 1
Regression:
j+2j+2
C a 9
j -j i t 9
j (-j i t reputeit1)
9( reputeit1) 9 contro+sit 9 it*1
-j i t denotes duy +orth
.uantile o+ er,itRe'ression o+ t 9 1 +los on tie t re%ent per+oran%e 'ivenreputation startin' at tie t
Re'ression +or ea% .uantile o+ er,it to a%%ount +or non4linearity(:evallier llison@ 133)
Apoorva Javadekar (Boston University) Reputation and Fund Flos February 8, 2016 3 ! "#
piri%al viden%e
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piri%al viden%e
Re$"ession ,utput: Fund Flows
Panel A: Raw
Returns
00"#(0006)
008#(000)
012#(000)
02#1(0010)
00"(0006)
0030(000)01"0
(000)02#6(0010)
0202(001")
Q2t Q1t
Q"t Q1t
Q#t Q1t
Qt Q1t
repute t 1
repute t 1 -Q2t Q1t .
reputet 1 -Q"t
Q1t . reputet 1 -Q#t
Q1t . reputet1 -Qt
Q1t .
001"(0011)
00"2(0012)
000(001#)
010(0018)
008"(001)
00#"(0013)
0108
(0021)
01#3(0026)0261(00"")
$nter%ept 006(00")
4006
(00")
40008(00")
AdG R2 016 0208 021
Results
Apoorva Javadekar (Boston University) Reputation and Fund Flos February 8, 2016 10 ! "#
piri%al viden%e
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p
Main Results Re'ression able
Result 4:
-i'ni+i%ant return chasing e,,ect i'norin' reputation
intera%tions and even a+ter %ontrollin' +or reputation
Result ):
.eturn chasing e,,ect is redu%ed by ore tan al+ a+terin%ludin' reputation intera%tions
Result 5: All te intera%tion ters are lar'e and si'ni+i%ant
-i'ni+i%ant C (-j -1|repute C high) > (-j -1|repute C +o/ )
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p
Flow/Schedule 0"aph
Apoorva Javadekar (Boston University) Reputation and Fund Flos February 8, 2016 12 ! "#
piri%al viden%e
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p
12a'ple
Best Fund:
-t C 1 and reputet1 C 0.30
7orst Fund:
-1t C 1 and reputet1 C 0.10
HFL! FL! (Best) FL! (!orst ) C #0.8
Break8Up:
-ource &ontri2ution
HFL! Iue to Return :asin' ++e%t 10
HFL! Iue to Reputation ++e%t 66
HFL! Iue to $ntera%tion ++e%t 2"0
Apoorva Javadekar (Boston University) Reputation and Fund Flos February 8, 2016 1" ! "#
piri%al viden%e
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Robustness 3hec)s
'hange in Market 1hare as dependent variable (-pie'el an'@2012) Result
Results valid a%ross a'e and si5e%ate'ories
Result
Results valid even i+ re%ent per+oran%e is %oputed over alon'erori5o
n
Result
Apoorva Javadekar (Boston University) Reputation and Fund Flos February 8, 2016 1# ! "#
piri%al viden%e
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ode
l
Apoorva Javadekar (Boston University) Reputation and Fund Flos February 8, 2016 1 ! "#
&odel
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Set/4p
anagerit unknon skill and 'enerates 'ross returnas
. t C 9 tit
t 0, 2
. .
&onve" cost of active management:
' (x )
C x 2
9et Return Process:
rt C ht1.t , . (h t 1 "t
"t1
1)2 .
ere ht1 denotes a%tively ana'ed sare o+ assets durin' tiet
Apoorva Javadekar (Boston University) Reputation and Fund Flos February 8, 2016 16 ! "#
&odel
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Investo"s and (elie#s
Investors:
Unit ass o+ risk neutral investors
+ra%tion o++/ays ttentive (AA)
1 +ra%tion ccasiona++y ttentive (KA)
a% period, (attention|) C < 1ave in+initely deep po%kets
Beliefs A2out anagerial -kill:
Atte end o+ tie t
t
2
t ( , )
t () C t (. t*1) C
t
Apoorva Javadekar (Boston University) Reputation and Fund Flos February 8, 2016 1 ! "#
&odel
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Mechanis' I
!uili2rium &ondition 7hen
C 1:
(Berk >reen@ 200#)
t (rt*1|ht, t )C0
Ieep po%kets ensure tat +und re%eive re.uired in+los
Full attention ensures tat no investor invests in negative
ana'er
!uili2rium &ondition 7hen
< 1:
t (rt*1|ht, t )50
Ieep po%kets ensure tat no positive e7pe%ted L=/ proGe%t e7ists
$nattentive investors %apital out+los %ould be less tan re.uired toattain 5ero L=/ %ondition
Inattention
C Kver4-i5ed +unds relative to %opetitive
ben%arkApoorva Javadekar (Boston University) Reputation and Fund Flos February 8, 2016 18 ! "#
&odel
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Mechanis' II
In euili2rium:
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Solution With < 6
Initial Investor &omposition:
A investorMs onersip at t C
0 is0 C
9 (1 )s
F
%Attentive ra%tion $n
xonoy
&ompetitive -i.e and Flows: "t7
satis+ytt Drt*1|ht, "7E C 0
and re.uired +los
e7
7
t C "t "t1(1 9 rt )
Attentive
&apital:
5t C
t1
t19 (1 )
As
ttentive Fra%tion
Nitin
xFund
t1 t" (1 9 r )
Apoorva Javadekar (Boston University) Reputation and Fund Flos February 8, 2016 20 ! "#
&odel
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Investo" 3o'position
1utflows t < t1$+ +und as enou' attentive %apitalO
t1
AAMs :ontribution o Kut+los C > t1 9 (1t1)
t1
t$+ 5t < |e7
| t C 0 as every attentive investor li.uidates
Inflowst > t1
AA4type %ontribute0 o+ ne %apital and out+los redu%e 0 is
upper liit o+t1
t is a ei'ted avera'e o+0 andt1
t (t1, 0)
Persistent outflows ;igh fraction of Inattentive
Investors
Apoorva Javadekar (Boston University) Reputation and Fund Flos February 8, 2016 21 ! "#
&odel
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%ea"nin$ and Fund Flows
Belief
Updates:
t C t1 9h
. 2t1
22
t1 9
..rt t1(rt )
.
t1
s
+
x
t 1
Ht bi''er +or over4si5ed +unds as t1(rt ) < 0
t1und Flows:
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Fund Flows 3ontinued
C Flatimited 1utflows:
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Flows With &a"ious !a"a'ete" &alues
Apoorva Javadekar (Boston University) Reputation and Fund Flos February 8, 2016 2# ! "#
&odel
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!e"#o"'ance !e"sistence
Reputati
on
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3alib"ation 12e"cise
Paramet
er
Valu
e
-ourc
e
f
low
t +
.
t 1
.
2
2 2
t1*
low -1 low . * low
high -1 high . * high
16 Iata (in%ludin' loads)
03" -ee belo003 Berk, >reen (200#)018 &oent Fittin'0#3 &oent Fittin'
-i.e
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12pe"i'ents o &alidate Model Mechanis'
;eterogeneit$ in Investors ;eterogeneit$ in
Flows 7hat events damp this heterogeneit$%
anagerial Replacement:edia nes, and oterso+t in+oration
i'er investor attention even +ro oterise inattentiveinvestors
dapened investor etero'eneity
#arge Front #oads
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3oncludin$ Re'a")s
Return chasing
'ets stron'er it reputation
=ersisten%e in poor per+oran%e +or lo4reputation
+unds
-iple odel it inattentive investors e7plains te etero'eneity in+lo4s%edule
$nterestin' to study risk si+tin' %onditional on reputation
Apoorva Javadekar (Boston University) Reputation and Fund Flos February 8, 2016 28 ! "#
&odel
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hank
0ou
Apoorva Javadekar (Boston University) Reputation and Fund Flos February 8, 2016 23 ! "#
&odel
R i With 3h i M ) t Sh
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Re$"ession With 3han$e in Ma")et Sha"e
Panel A: Raw
Returns
Panel B: &AP 8
Alpha00#2(0026)
010(00"2)
028(00"")
010(00#6)
0061
(0026)01"1
(00"6)
026(00")
0#30(00#)
Q2t Q1t
Q"t Q1t
Q#t Q1t
Qt Q1t
reputet1
reputet1 -Q2t Q1t .
reputet1 -Q"t
Q1t . reputet1 -Q#t
Q1t . reputet 1 -Qt
Q1t .
4012(00#6)
40186(003)
4018(001)
4016(000)
400#8(0060)0"26
(0038)0(0163)
0811(012#)
1"03
(0186)
4008
(00##)401"0(001)
40110(00")
401#3
(0063)4002"(0066)023
(0088)01(0166)
0"(0121)
113(0186)$nter%ept 40183
(02#0)4021(022")
40220(02"1)
40"0(0221)
AdG R2 0062 0088 00 00
Ba%k to Robustness
Apoorva Javadekar (Boston University) Reputation and Fund Flos February 8, 2016 "0 ! "#
&odel
A A d Si R b t With R R t
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A$e And Si9e Robustness With Raw Retu"ns
Panel A: Age
Bins
Panel B: -i.e
Bins
Q2t Q1t
Q"t Q1t
Q#t Q1t
Qt Q1t
reputet 1
reputet 1 -Q2t Q1t .
reputet 1 -Q"t
Q1t . reputet 1 -Q#t
Q1t . reputet 1 -Qt
Q1t .
0oung
4
000#(002#)0023
(0026)00
(00"0)01
(00"3)
00(0028)
00#2(00"8)0126
(00#2)01(002)
0268(0066)
0oung
*
0011(0012)
00"(001")
00#6(001#)
008(0013)
003(0018)
00#8
(0021)0083
(002#)
012(0026)
02"(00"6)
-mall
4
40001(001)0016
(001)00#1
(002")0116(0028)
006(002#)008
(00"1)
016#(00"6)
021#(00")
0"2"(00)
-mall
*
00"#(0016)00#(001)00#8
(001)0086(0021)
003"(0020)
001#(0026)
000(0028)
0122(0028)
02#6(00")
$nter%ept 0036(0122)
4006(00"3)
002#(00)
400##(00#1)
AdG R2 0203 02"# 0181 0268
Ba%k to Robustness
Apoorva Javadekar (Boston University) Reputation and Fund Flos February 8, 2016 "1 ! "#
&odel
% H i F R t ! #
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%on$e" Ho"i9on Fo" Recent !e"#o"'ance
Panel A: Raw
Returns
Panel B: &AP 8
Alpha0013
(0008)0060
(0003)
0101(0003)
021(001")
00"3(0008)
008(0008)
012"(0010)
0212(001")
0008(0008)
00#2(0003)
00#(0003)
01(001")
018(001#)
0023(0008)
00#1(0008)003
(0010)01"(001")
016(001#)
Q2t Q1t
Q"t Q1t
Q#t Q1t
Qt Q1t
reputet2
reputet2 -Q2t Q1t .
reputet 2 -Q"t
Q1t . reputet 2 -Q#t
Q1t . reputet 2 -Qt
Q1t .
000(001)0021
(0016)002#
(0018)00#8
(0028)0066
(0022)0022(0023)
006"(00"0)
011(00"1)
02"0(00#")
0001(001#)001
(001)00"
(0018)00"#
(0028)00#0
(0022)003
(002)
006
(00"0)01##
(00"1)02
(00##)
$nter%ept 00"(00"6)
400"(00"6)
4000(00"6)
0002(00"6)
400#(00"6)
400"(00")
AdG R2 0"23 0"#" 0"# 0"26 0""3 0"##
Ba%k to Robustness
Apoorva Javadekar (Boston University) Reputation and Fund Flos February 8, 2016 "2 ! "#
&odel
Re$"ession With Mana$e"ial Replace'ent
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Re$"ession With Mana$e"ial Replace'ent
Panel A: Raw
Returns
Panel B:
&AP 8Replacement 0es 9o 0es 9o
=er+t 01" 012" 0163 01#64002 40023 40061 400""
reputet1 000 00"# 4001" 400"6
400#6 4002# 400# 4002"
=er+t reputet1 0136 0"1" 010# 0280
40102 400 40033 4002
$nter%ept 4012" 0008 4008# 400034008 400#" 40088 400#
Ba%k to 7perients
Apoorva Javadekar (Boston University) Reputation and Fund Flos February 8, 2016 "" ! "#
&odel
Re$"essions Ac"oss Fee St"uctu"es
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Re$"essions Ac"oss Fee St"uctu"es
Panel A: Raw
Returns
Panel B: &AP 8
Alpha
Front #oad #ow ;igh #ow ;igh
=er+t 011 01" 016 0166(00#2) (00"3) (00#3) (00"3)
reputet1 00# 0036 008 0038
(00"6) (00") (00") (00"2)
=er+t reputet1 0268 01#0 0222 0102
(001) (0066) (0081) (006)
$nter%ept 0106 400 0108 40032(008) (0066) (008) (0066)
Ba%k to 7perients
Apoorva Javadekar (Boston University) Reputation and Fund Flos February 8, 2016 "# ! "#