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Academics Present Research on ETFs, Mutual Fund Portfolio Pumping, Liquidity Management

Attendees at a recent conference at the SEC heard the latest in academic research relating to the asset management industry. Topics included the widespread implications of ETFs in the markets and researchers’ findings that, as ETFs continue to grow and gain higher ownership of stocks, such growth can reduce the ability of investors to diversify liquidity shocks. Another team examined mutual fund liquidity management, correlations in stock holdings and fund flows, finding that some funds manage their liquidity exposure by reducing their portfolio overlap with peer funds when they experience increased flow correlations. A third paper investigated the practice of portfolio pumping at the fund family level, a strategy executed when non-star fund managers buy stocks held by the star funds in the family at quarter end in order to inflate the performance of star funds. The pumping managers, in return, receive more inflows in the following quarter than non-pumping managers in the family, according to the researchers. The authors note that increased SEC scrutiny since 2002 had led to a decrease in performance inflation at the turn of quarters however, “fund family managers still have the incentive to pump the portfolio of their top funds.”

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