The Role of Outstanding Foundation Awards in Fund Families

• Author: Pi‐Hsia Hung,Pei‐Jhen Su,Lin Lin
• DOI: http://doi.org/10.1111/ajfs.12160
• Published date: 01 February 2017
• Date: 01 February 2017

The Role of Outstanding Foundation

Awards in Fund Families

Lin Lin

Department of Banking and Finance, National Chi Nan University, Taiwan, Republic of China

Pi-Hsia Hung*

Department of Banking and Finance, National Chi Nan University, Taiwan, Republic of China

Pei-Jhen Su

Sunny Bank Ltd, Taiwan, Republic of China

Received 10 February 2015; Accepted 5 November 2016

Abstract

This study employs unique data concerning “Outstanding Foundation Awards” in Taiwan to

investigate the determinant factors of winning awards and the contributions of award funds

to the respective fund families. Our results show that fund fees, performance, age, volatility,

family fees, and family award winning experiences are important predictors of winning

awards. One-, three-, and five-year award funds charge higher fund fees over a 1-year post-

award period; however, they do not experience an increase in their own fund/family flows

after winning the awards.

Keywords Award winner; Fund characteristics; Fund performance; Fund family strategies;

Spillover effect

JEL Classification: G11, G14, G23

1. Introduction

While there exist a variety of innovative financial products in the capital markets of

the world, mutual funds continue to be popular investment vehicles for their cost-

efficiency and tax-deductibility. They allow almost all kinds of investors to build

diversified and liquid portfolios regardless of their attitudes toward risk, number of

investments, and preference toward financial products. The worldwide assets under

management in the fund industry from 1976 to 2015 grew more than 500 times,

with this number surpassing US$37.19 trillion at the end of 2015.

1

The rapid

*Corresponding author: Pi-Hsia Hung, No. 1, University Road, Puli, Nantou 54561, Taiwan.

Tel: +011-886-49-2910960 ext. 4624, Fax: +011-886-49-2914511, email: phhung@ncnu.

edu.tw.

1

See the InvestmentCompany Institute (ICI) website: http://www.ici.org/research/stats/worldwide

Asia-Pacific Journal of Financial Studies (2017) 46, 87–115 doi:10.1111/ajfs.12160

©2017 Korean Securities Association 87

development of the mutual fund industry has been supported by an increasing

number of fund holders, along with experts who offer professional fund informa-

tion and investment strategies. However, the information and strategies that fund

investors see as being vital for their investments are so far unclear and thus have

become an appealing line of research in the past few decades (see Grinblatt et al.,

1995; Malkiel, 2013).

As Taiwan’s financial market expands, mutual funds have become an increas-

ingly preferred investment vehicle. According to data from the Securities Investment

Trust and Consulting Association of the R.O.C., the total net asset value of domes-

tic mutual funds amounted to US$109.87bn at the end of 2015.

2

Most investors in

Taiwanese large mutual funds are small-amount investors (Shu et al., 2002). As

small investors are less sophisticated than large-amount or institutional investors,

award-winning funds that have performed outstandingly in the market have become

an important part of the information process for individual investors’ decision

making.

Analyzing Taiwan’s market allows us to improve our understanding of active

emerging market environments where institutional investors are not the dominan t

participants. By analyzing unique data, our study investigates the role of award

funds in their corresponding families and addresses the following research ques-

tions: (i) What are the determinants of winning Outstanding Foundation Awards?

(ii) What are the determinants of the fund family’s award-winning ratio? (iii) What

is the contribution of award funds to fund families in terms of fund fees, flows,

and performance?

There exist a large number of studies on fund selection and mutual fund invest-

ing strategies. For example, Fant and O’Neal (2000) suggest that past performance

is a reliable measure of fund selection. Scholars do realize that most individual

mutual funds should not be treated as independent investment vehicles, but rather

as a part of a fund family where investors can flexibly switch from selected funds

with a limited sales charge (Elton et al., 2006, 2007) and also benefit from opera-

tional convenience and recordkeeping (Kempf and Ruenzi, 2008). Gaspar et al.

(2006) also find that a strongly performing fund with a higher expense rate tends

to have a higher fund value and an ability to bring in greater commission and man-

agement fees to its fund family, which then induces its family to reallocate internal

resources in an attempt to further enhance the performance of this fund at the

expense of that of relatively low-fee funds in the same family. Moreover, the convex

relationship between fund cash inflow and performance also rationalizes this strat-

egy (Sirri and Tufano, 1998).

Chevalier and Ellison (1999) note that such a difference concerning investors’

asymmetry responses toward strongly and weakly performing funds is more com-

mon between younger funds, that is, a fund family will be further motivated to

2

See http://www.sitca.org.tw/SitcaEnglish.aspx.

L. Lin et al.

88 ©2017 Korean Securities Association