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  • Also edited by Greg N. Gregoriou



  • Diversification andPortfolio

    Management ofMutual Funds

    Edited by


  • Selection and editorial matter Greg. N. Gregoriou 2007Individual chapters contributors 2007

    All rights reserved. No reproduction, copy or transmission ofthis publication may be made without written permission.

    No paragraph of this publication may be reproduced, copied ortransmitted save with written permission or in accordance withthe provisions of the Copyright, Designs and Patents Act 1988,or under the terms of any licence permitting limited copyingissued by the Copyright Licensing Agency, 90 Tottenham CourtRoad, London W1T 4LP.

    Any person who does any unauthorized act in relation to thispublication may be liable to criminal prosecution and civilclaims for damages.

    The authors have asserted their rights to be identified asthe authors of this work in accordance with the Copyright, Designs and Patents Act 1988.

    First published 2007 byPALGRAVE MACMILLANHoundmills, Basingstoke, Hampshire RG21 6XS and175 Fifth Avenue, New York, N.Y. 10010Companies and representatives throughout the world

    PALGRAVE MACMILLAN is the global academic imprint of the PalgraveMacmillan division of St. Martins Press, LLC and of Palgrave Macmillan Ltd.Macmillan is a registered trademark in the United States, United Kingdomand other countries. Palgrave is a registered trademark in the EuropeanUnion and other countries.

    This book is printed on paper suitable for recycling andmade from fully managed and sustained forest sources.

    A catalogue record for this book is available from the British Library.

    Library of Congress Cataloging-in-Publication DataDiversification and portfolio management of mutual funds / edited by Greg N. Gregoriou.

    p. cm.Includes bibliographical references and index.

    1. Mutual funds. 2. Portfolio management. I. Gregoriou, Greg N., 1956HG4530.D575 2006332.6327dc22 2006043574

    10 9 8 7 6 5 4 3 2 116 15 14 13 12 11 10 09 08 07

    ISBN 978-1-349-28541-9 ISBN 978-0-230-62650-8 (eBook)DOI 10.1057/9780230626508

    Softcover reprint of the hardcover 1st edition 2007 978-0-230-01915-7

  • To my mother Evangelia and in loving memory of my father Nicholas

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  • vii

    Acknowledgments xii

    Notes on the Contributors xiii

    Introduction xxiii

    1 Diversification into Art Mutual Funds 1Rachel Campbell and Joshua Pullan1.1 Introduction 11.2 Art as an asset 21.3 Art mutual funds 51.4 Art price data qualifications 81.5 Conclusion 15

    2 Funds of Funds: Diversification, Selection orExpense Arbitrage? 18Clark L. Maxam, Seow Eng Ong and Craig Wisen2.1 Introduction 182.2 FOF background and data 212.3 The data 282.4 Empirical results 322.5 Conclusion 47

    3 Are Investors Home Biased? Evidence from Germany 57Andreas Oehler, Marco Rummer, Thomas Walker andStefan Wendt3.1 Introduction and related work 573.2 Data 623.3 Empirical analysis 653.4 Conclusion 73


  • 4 International Mutual Fund Efficiency and Monetary Policy Sensitivity 78Giampaolo Gabbi4.1 Introduction 784.2 The efficiency model and estimates 794.3 Monetary policy sensitivity of international indices 844.4 International mutual funds efficiency and

    monetary policy 894.5 Conclusion 92

    5 Equity Portfolio Construction: A Comparative Analysis 94Raffaele Zenti, Massimiliano Pallotta, Claudio Marsalaand Stefano Ricci5.1 Introduction 945.2 Portfolio construction: the main steps 965.3 Back-testing methodology and datasets features 1095.4 Main results 1125.5 Conclusion 118

    6 Improvements and Limitations of the RevisedMorningstar Fund Rating Methodology 121Roman Krussl6.1 Introduction 1216.2 The new Morningstar fund-rating approach 1236.3 Improvements and limitations 1276.4 Conclusion 133

    7 Mutual Fund Flows and Expected Stock Returns in Germany: The Role of the Benchmark and of Expectation Biases 138Wolfgang Breuer and Olaf Stotz7.1 Introduction 1387.2 Portfolio selection and exogenous returns 1417.3 Portfolio selection and endogenous returns 1437.4 Numerical analysis 1457.5 Implications and hypotheses 1517.6 Empirical analysis 1557.7 Conclusion 161

    8 Herding Behavior: Evidence from PortugueseMutual Funds 167Jlio Lobo and Ana Paula Serra8.1 Introduction 1678.2 Hypotheses and methodology 170


  • 8.3 Data 1748.4 Results 1778.5 Conclusion 186

    9 The Best of Both Worlds Fund: Exchange Traded Funds in Australia 198Paul U. Ali9.1 Introduction 1989.2 ETF structure 1999.3 The anti-delegation rule 2029.4 Conclusion 204

    10 The Relative Impact of Different Classification Schemeson Mutual Fund Flows 206Alexei P. Goriaev10.1 Introduction 20610.2 Data description 21010.3 Methodology 21310.4 Relationship between flows and performance relative

    to the stated objective category 21610.5 Relationship between flows and performance

    relative to the stated objective, Morningstar style,and asset class categories 219

    10.6 Relationship between flows and ordinal as well ascardinal measures of performance 224

    10.7 Category-specific flow spillover effect froma star fund to the other funds in the family 226

    10.8 Conclusion 228

    11 Exploiting Industry Momentum with Sector Funds:The Case of the European Market 232Radu Burlacu, Patrice Fontaine and Sonia Jimenez-Garces11.1 Introduction 23211.2 Industry-sector mutual funds 23511.3 Sample and descriptive statistics 23611.4 Average returns of momentum portfolios 24011.5 The performance of momentum portfolios 24511.6 Additional investigations 24811.7 Conclusion 252

    12 US and Chinese Mutual Fund Regulation 256Mercer Bullard, Guangxi Jia, Jin Meng and Ji Qi12.1 Introduction 25612.2 Background 257


  • 12.3 Fund offerings 25812.4 Fund governance 25912.5 Disclosure requirements 26112.6 Fund fees 26412.7 Distribution compensation 26512.8 Pricing, sales and redemptions 26612.9 Affiliated transactions 26812.10 Money market funds 26912.11 Conclusion 270

    13 Some Insights on the Behavior of the Mutual FundIndustry in Spain 272Manuel Moreno and Gonzalo Rubio13.1 Introduction 27213.2 The mutual fund industry in Spain 27613.3 Data 27713.4 Models of performance evaluation 28013.5 Empirical results 28213.6 Conclusion 308

    14 On the Supposed Foreign Superiority: The ItalianTax Puzzle 312Roberto Savona14.1 Introduction 31214.2 Economic framework 31314.3 The tax puzzle 31414.4 The database 31514.5 Empirical results 31714.6 Conclusion 324

    15 Corporate Governance of Mutual Funds in Pakistan 334Muhammad Akbar Saeed and Nadeem A. Syed15.1 Introduction 33415.2 Importance of corporate governance for mutual funds 33815.3 History of mutual funds in Pakistan 33915.4 Code of corporate governance in Pakistan and

    international best practices 34115.5 Conclusion 350

    16 Determinants of Pension Funds Underwritingand Implications for Portfolio Management:Evidence from Italy 353Carlo Fiorio and Marco Percoco16.1 Introduction 35316.2 Social security reforms in Italy 357


  • 16.3 Empirical evidence on pension funds underwriting 35916.4 Some implications for portfolio management

    of pension funds 36616.5 Conclusion 370

    17 Managerial Response to Mutual Fund Performance in the Spanish Market: An Agency Approach 373Begoa Torre-Olmo, Carlos Lpez-Gutirrez and Sergio Sanfilippo Azofra17.1 Introduction 37317.2 Agency problems associated with information

    asymmetries between managers and mutualfund investors 374

    17.3 Data and methodology 38117.4 Results 38217.5 Conclusion 385

    18 Analysis of the Mutual Fund Demand in the Spanish Market 389Begoa Torre-Olmo, Carlos Lpez-Gutirrez and Sergio Sanfilippo Azofra18.1 Introduction 38918.2 The role of mutual funds in the future of

    financial activity 39118.3 The influence of behavioral factors in investor

    decisions to choose mutual funds 39418.4 Empirical analysis 39618.5 Conclusion 404

    Index 409


  • xii

    I would like to thank Stephen Rutt, Publishing Director, and AlexandraDawe, Assistant Editor at Palgrave Macmillan, for their suggestions, effi-ciency and helpful comments throughout the production process, as well asKeith Povey (with Paul Dennison and Nick Fox) for copy-editing and edi-torial supervision of the highest order. In addition, I would like to thank thenumerous anonymous referees in the US and Europe during the reviewand selection process of the articles proposed for this volume.


  • xiii

    The Editor

    Greg N. Gregoriou is Associate Professor of Finance and coordinator offaculty research in the School of Business and Economics at the StateUniversity of New York (Plattsburgh). He obtained his PhD (Finance) fromthe University of Quebec at Montreal and is the hedge fund editor for thepeer-reviewed journal Derivatives Use, Trading and Regulation published byPalgrave Macmillan based in the UK. He has authored over 50 articles onhedge funds, and managed futures in various US and UK peer-reviewedpublications, including the Journal of Portfolio Management, the Journal ofFutures Markets, the European Journal of Finance, the Journal of AssetManagement, the European Journal of Operational Research, and Annals ofOperations Research. He has published four books with John Wiley & SonsInc. and four with Elsevier.

    The Contributors

    Paul U. Ali is an Associate-Professor in the Faculty of Law, University ofMelbourne, Australia. Paul was previously a finance lawyer in Sydney.Paul has published several books and jou