Rich Fortin

MUTUAL FUND TRADING COSTS

T his article examines the tradmg costs of a large population of mutual funds across investment categories over time. An important piece of information not provided to mutual fund investors in the prospectus trading costs can be a deadweight drag on investment performance. Only if the investor specifically requests the statement of adltional information from the fund company is this information provided. To date, there has been little empirical research in this area. The one exception is a study by Livingston and O’Neal [1996], which examines brokerage costs for 240 equity mutual funds over the 1989-1993 period. The authors find that brokerage commission expenses are significant in relation to other fund expenses, and suggest that these expenses should not be relegated to the statement of additional information, which most investors never see. Our study extends the Livingston-O’Neal study to essentially all classes of mutual funds over a similar time frame. Because investors are concerned with all the costs that reduce their return, not only those included in the expense ratio, the information we provide for mutual fund trading costs should be of particular relevance to the investment community. The analysis first provides summary descriptive statistics on mutual fund brokerage costs and related fund variables. A regression model is then used to examine the relationship between trading costs and fund turnover, expense ratio, size, and load/no-load status. DATA

Active international mutual fund management; can managers neat the index?

We examine the benefits of active international mutual fund management. Is there an advantage to active fund management over investing in index funds? Previous research has found that for domestic funds, active fund management can not outperform index funds. But there has been no clear conclusion as to active international mutual fund management. We utilize Morningstar Mutual Fund data to analyze five international mutual fund categories, and overall, for a sample of 831 funds with 4,835 annual return data points. We find the difference in mean return (index minus fund return) is negative for all fund categories, except for Europe funds. The difference is significant overall and for four of the five fund categories. The results from the multivariate regression show no relationship between total return and expense ratio, but there is a significant positive relationship between total return and turnover, and a significant positive relationship between total return and fund size (LN net assets). As opposed to domestic mutual funds, it appears to be beneficial to select actively managed international mutual funds over index funds.

The Earnings Forecast Accuracy of Financial Analysts Who are CFA Charterholders

This article examines the earnings forecast accuracy of financial analysts who have earned the right to use the CFA designation. Given the extensive rigor of the three-level CFA examination along with the substantial work experience requirements and required adherence to a strict Code of Ethics and Standards of Professional Conduct, it is hypothesized that CFA charterholders will provide more accurate earnings estimates than other financial analysts not holding the CFA charter. Our estimation results support this hypothesis. We find that, on average, financial analysts who hold the CFA charter provide 3.78% (2.70%) “tighter” forecast accuracy than non CFA charterholders for annual (quarterly) data respectively over the 1986 through 2002 time period. This is important information to the investment community as investors use financial analyst earnings forecasts in making assessments of correct security valuation.

Do Mutual Fund Supermarket Programs Raise Expense Ratios

This article investigates the hypothesis that there are significant differences in mutual fund expense ratios after inclusion of these funds in the Schwab Retail OneSource supermarket program. The data covers the 1991–1998 peroid for ten investment categories. The results show that there is a significant decrease in expense ratios after inclusion in the Schwab OneSource program. This result is important for investors that are considering investing in mutual funds through a supermarket program because expense ratios have a direct impact on their returns.

Option introduction and insider trading in the NASDAQ/NMS equity market

This paper investigates and supports the hypothesis that insiders have an incentive to shift their informed trading activities when options initially are listed for a firm. Firm size is found to be related to the level of insider trading activity. There is a significant decrease in insider equity-market volume for the smallest third of firms, a significant increase in insider-equity market volume for the middle third of firms, and a significant decrease in insider equity-market volume for the largest third of firms. This supports the hypothesis of a difference in the degree of impact on equity volume upon option introduction based upon firm size. This research provides additional evidence of informed trading activities when option introduction, insider trading, and firm size are considered simultaneously.