Hostname: page-component-78c5997874-xbtfd Total loading time: 0 Render date: 2024-11-15T01:59:31.348Z Has data issue: false hasContentIssue false
  • English
  • Français

The Impact of Mutual Fund Family Membership on Investor Risk

Published online by Cambridge University Press:  06 April 2009

Edwin J. Elton ,
Martin J. Gruber  and
T. Clifton Green
Edwin J. Elton
Affiliation:
eelton@stern.nyu.edu, Stern School of Business, New York University, 44 W 4th St, Ste 9–190, New York, NY 10012
Martin J. Gruber
Affiliation:
mgruber@stern.nyu.edu, Stern School of Business, New York University, 44 W 4th St, Ste 9–190, New York, NY 10012
T. Clifton Green
Affiliation:
clifton.green@emory.edu, Goizueta Business School, Emory University, 1300 Clifton Rd, Atlanta, GA 30322.
Get access Rights & Permissions [Opens in a new window]

Abstract

Many investors confine their mutual fund holdings to a single fund family either for simplicity or through restrictions placed by their retirement savings plan. We find evidence that mutual fund returns are more closely correlated within than between fund families. As a result, restricting investment to one fund family leads to a greater total portfolio risk than diversifying across fund families. We examine the sources of this increased correlation and find that it is due primarily to common stock holdings, but is also more generally related to families having similar exposures to economic sectors or industries. Fund families also show a propensity to focus on high or low risk strategies, which leads to a greater dispersion of risk across restricted investors. An investor considering adding an additional fund, either in the same family or outside the family, would need to believe the inside fund offered an extra 50 to 70 basis points to have the same Sharpe ratio.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 42 , Issue 2 , June 2007 , pp. 257 - 277
Copyright
Copyright © School of Business Administration, University of Washington 2007

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Benartzi, S., and Thaler, R.. “Naïve Diversification Strategies in Defined Contribution Saving Plans.” American Economic Review, 91 (2001), 78–98.CrossRefGoogle Scholar
Brown, S., and Goetzmann, W.. “Mutual Fund Styles.” Journal of Financial Economics, 43 (1997), 373–399.CrossRefGoogle Scholar
Choi, J.; Laibson, D.; Madrian, B.; and Metrick, A.. “Consumption-Wealth Comovement of the Wrong Sign.” Working Paper, University of Pennsylvania (2004).Google Scholar
Elton, E., and Gruber, M.. “Portfolio Analysis and Equilibrium with a Non-Normal Multi-Index Return-Generating Process.” Review of Quantitative Finance and Accounting, 2 (1992), 5–16.CrossRefGoogle Scholar
Elton, E.; Gruber, M.; and Blake, C.. “A First Look at the Accuracy of the CRSPMutual Fund Database and a Comparison of the CRSP and Morningstar Mutual Fund Databases.” Journal of Finance, 56 (2001), 2415–2430.CrossRefGoogle Scholar
Elton, E.; Gruber, M.; and Blake, C.. “The Adequacy of Investment Choices Offered by 401K Plans.” Journal of Public Economics, 3 (2006), 303–318.Google Scholar
Fama, E., and French, K.. “The Cross-Section of Expected Stock Returns.” Journal of Finance, 47 (1992), 427–465.Google Scholar
Ibbotson Associates. “Stocks, Bonds, Bills and Inflation.” Chicago, IL (2004).Google Scholar
Investment Company Institute and Securities Industry Association. “401(k) Plan Participants: Characteristics, Contributions, and Account Activity.” (2000).Google Scholar
Investment Company Institute and Securities Industry Association. “Equity Ownership in America.” (2002).Google Scholar
Khorana, A., and Servaes, H.. “An Examination of Competition in the Mutual Fund Industry.” Working Paper, Georgia Institute of Technology (2003).Google Scholar
Liang, N., and Weisbenner, S.. “Investor Behavior and the Purchase of Company Stock in 401K Plan Design.” Working Paper, University of Illinois (2002).CrossRefGoogle Scholar
Treynor, J., and Black, F.. “How to Use Security Analysis to Improve Portfolio Selection.” Journal of Business, 46 (1973), 66–86.CrossRefGoogle Scholar