- Consistent with the fact that small and illiquid stocks are subject to higher price pressure and are easier to manipulate, fund families choose to buy small stocks to pump the portfolios of their star funds.
- It is more likely that managers of large funds in small families help pump their star funds. And it is very likely that managers engaging in the family-level portfolio pumping are the same managers of the star funds in the family.
- Fund managers inflate their NAVs at quarter-ends (including year-end) and NAVs reverse on the following trading day. The average daily return of funds at the end of the quarter is 0.48%, and -0.46% at the beginning of the quarter.
- The average daily return of funds at the end of the year is 0.07%, and -1.02% at the beginning of the year.
- There is no NAV change at the close of months not ending a quarter.
- Focusing only on star funds in fund families, NAV inflation exists at quarter-ends (March, June and September). The average daily return at quarter-ends is 1.01%, and the average daily return in the following days is -0.61%.
- The average daily return of star funds at the end of years is -0.43%, and -2.57% at the beginning of years.
- There’s a spillover effect, as fund managers are compensated more with future inflows when they pump the portfolio of star funds in the family.
Summary
The publication of findings regarding individual fund pumping drew the attention of the SEC, which led to fund families finding another way to pump up the returns of their star funds and mislead investors.
Just another reason, among many, for investors to use passively managed funds, which have no reason to engage in such behaviors.
Larry Swedroe is the director of research for The BAM Alliance, a community of more than 140 independent registered investment advisors throughout the country.
