Copycat funds : information disclosure regulation and the returns to active management in the mutual fund industry

46 Pages·2001·1.1 MB·English

by  Myers, Mary Margaret

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Massachusetts Institute of Technology
Department of Economics
Worl<ing Paper Series
Copycat Funds: Information Disclosure Regulation
and the Returns to Active Management
in the Mutual Fund Industry
Mary Margaret Myers
James M. Poterba
Douglas A. Shackelford
John B. Shoven
Working Paper C2-04
October 2001
Room
E52-251
50 Memorial Drive
MA
Cambridge, 021 42
This paper can be downloaded without charge from the
Social Science Research Network Paper Collection at
http://papers.ssm.com/paper.taf7abstract id=293617

f
Massachusetts Institute of Technology
Department of Economics
Working Paper Series
Copycat Funds: Information Disclosure Regulation
and the Returns to Active Management
In the Mutual Fund Industry
Mary Margaret Myers
James M. Poterba
Douglas A. Shackelford
John B. Shoven
Working Paper 02-04
October 2001
Room
E52-251
50 Mennorial Drive
MA
Cambridge, 021 42
This paper can be downloaded without charge from the
Social Science Research Network Paper Collection at
http://papers.ssm.com/paper.tafPabstract id=xxxxx
MASSACHUSEHS INSTITUTE
OFTECHWOLOGY
MAR 7 2002
LIBRARIES
Copycat Funds: Information Disclosure Regulation and the
Returns to Active Management in the Mutual Fund Industry
Mary Margaret Myers
Graduate School ofBusiness, University ofChicago
1101 East 58th Street, Chicago IL 60637
JamesM. Poterba
Department ofEconomics, MIT
MA
50 Memorial Drive, Cambridge 02142-1347
Douglas A. Shackelford
Kenan-Flagler Business School, University ofNorth Carolina
CampusBox 3490, McCoU Building, Chapel Hill, NC 27599-3490
John B. Shoven
Department ofEconomics, Stanford University
Encina Hall, Stanford CA 94305
Revised October2001
Contact Author:
MA
JamesPoterba, DepartmentofEconomics E52-350, MIT, 50 Memorial Drive, Cambridge 02142-
1347;tel [phone]; fax [phone]; email [email protected]
ABSTRACT
Mutual ftinds mustdisclose theirportfolio holdings to investors semiannually. The costs andbenefits of
such disclosures are a long-standing subject ofdebate. For actively managed funds, one cost ofdisclosure
is apotential reduction in the private benefits firom research on assetvalues. Disclosureprovides public
access to information onthe assets that the fund managerviews as undervalued. This papertries to
quantify this potential cost ofdisclosure by testing whether "copycat" mutual fijnds, fiands that purchase
the same assets as actively-managed fiinds as soon as those asset holdings are disclosed, can earn retums
that are similarto those ofthe actively-managed fiands. Copycat fiands do not incur the research expenses
associated with the actively-managed funds that they are mimicking, but they miss the opportunity to
investin assetsthatmanagers identify as positive return opportunities between disclosure dates. Oior
results for a limited sample ofhigh expense fiands in the 1990s suggest that while retums before expenses
are significantly higher forthe underlying actively managed funds relative to the copycat funds, after
expenses copycat funds cam statistically indistinguishable, andpossibly higher, retums than the
underlying actively managed fiands. These findings contribute to the policy debate on the optimal level
and frequency offimd disclosure.
We are grateful to Dan Bergstresser, Joel Dickson, Jennifer Wilson, seminarparticipants at the University
ofIllinois-Chicago and Indiana University, and especially Mark Wolfson for helpfiil discussions. We
also thank JenniferBlouin, V.J. Bustos, Rachel Ferguson, Michael Myers, Angel Townsend, and Candice
&
Whitehurst forexcellentresearch assistance, the Ernst Young Foundation, theNational Science
Foundation (Poterba) and the University ofChicago (Myers) forresearch support, and John Rekenthaler
and Annette Larson at Momingstarforproviding mutual fund data.