Topic: Don’t Take Their Word For It: The Misclassification of Bond Mutual Funds
Speaker: Umit Gurun, University of Texas at Dallas
Time: Wednesday, 18 March, 10:00-11:15am Beijing Time
Location: Microsoft Teams Online conference room
We provide evidence that mutual fund managers misclassify their holdings, and that these misclassifications have a real and significant impact on investor capital flows. In particular, we provide the first systematic study of bond funds’ reported asset profiles to Morningstar against their actual portfolios. Many funds report more investment grade assets than are actually held in their portfolios, making these funds appear significantly less risky. This results in pervasive misclassifications across the universe of US fixed income mutual funds by Morningstar, who relies on these reported holdings. The problem is widespread- resulting in about 30% of funds being misclassified with safer profiles, when compared against their actual, publicly reported holdings. “Misclassified funds” – i.e., those that hold risky bonds, but claim to hold safer bonds– outperform the actual low-risk funds in their peer groups. “Misclassified funds” therefore receive higher Morningstar Ratings (significantly more Morningstar Stars) and higher investor flows due to this perceived outperformance. However, when we correctly classify them based on their actual risk, these funds are mediocre performers. Misreporting is stronger following several quarters of large negative returns, and it is strong at the fund family level.
Umit Gurun is Ashbel Smith chaired professor of finance and accounting at the University of Texas at Dallas. He received his PhD from the Michigan State University. He is a past visiting professor at University of Texas at Austin (2010-2011) and Harvard University (2014). He is an associate editor of Management Science and a research economist at NBER. Professor Gurun’s research focuses on a variety of issues in empirical asset pricing and corporate finance, including the impact of financial media and advertising on asset prices. He is particularly interested in the ways that networks affect firm values and investor portfolio allocation. His research has been published in top journals, including Science, Journal of Finance, Review of Financial Studies, Journal of Financial Economics, Journal of Accounting Research, Management Science, and Harvard Business Review. His recent research relates to the effects of patent litigation on corporate innovation. In this vein, he has been awarded a National Science Foundation grant to investigate the effects of patent litigation policy on innovation outputs. He received distinguished associate editor awards from Management Science five times between 2015 and 2019, and a distinguished referee award from Review of Financial Studies in 2019. Finally, his research has also attracted attention in the popular press, with cites in the Fortune, Institutional Investor, and the Economist.
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