CFA Institute Journal Review summarizes "The Impact of Portfolio Holdings Disclosure on Fund Returns," by Russell Gregory-Allen, Hatice Ozer Balli, and Kathleen Thompson, published in the Pacific-Basin Finance Journal, October 2019.
The study sheds light on the effects of strengthening the mandatory disclosure regime. The authors find no change in the ability of funds’ managers to outperform when portfolio positions are disclosed.
What Is the Investment Issue?
The authors analyze the impact of enacting stronger disclosure rules on fund performance.
According to conventional wisdom, the more information is disclosed, the worse fund performance may be. However, attracting potential investors is impossible without a certain disclosure level. The costs and benefits of portfolio holdings disclosure have long been the subject of debate among practitioners, researchers, regulators, academics, and governments evaluating existing disclosure laws.
Portfolio disclosure allows for improved oversight and monitoring by investors. Shareholders can monitor by how much a given fund drifts away from its stated objective. Next, any fraudulent behavior can be more easily detected (e.g., window-dressing). Last, relevant data are available for researchers and academics.
The drawbacks of portfolio disclosure include front-running by investors and speculators, copycat investing policies, and higher costs for funds related to producing and distributing disclosure information.
The authors find no convincing evidence that disclosure impacts fund returns either positively or negatively. Instead, they underline the benefit disclosure gives to investors and regulators, as well as to the monitoring function itself.
How Did the Authors Conduct This Research?
The authors take a dual approach to verify the research thesis. First, they compare investment funds from Australia and New Zealand whose managers have decided to disclose information voluntarily to those funds that decided to refrain from disclosure. Second, they look at the performance of KiwiSaver funds in New Zealand before and after 2013, when these funds were obliged to take on disclosure requirements.
The authors model fund performance using four measures and controlling for previous performance, standard deviation, and fund size. They also check for robustness with endogeneity, different horizons, and lags as well as reviewing past performance, legislation, and disclosure.
The authors use the Morningstar database as their source, noting it as the most comprehensive source of fund characteristics for Australian and New Zealand funds. The database contains holdings voluntarily disclosed by the funds. The authors focus only on active equity funds, and they use Morningstar’s “MPT benchmark” to assess fund performance. They include analysis of two types of non-risk-adjusted returns from the Morningstar database, Raw Return and Active Return (outperformance relative to the MPT benchmark), as well as two risk-adjusted returns using the four-factor model of Carhart and Fama–French. The authors then look at quarterly data in the regressions.
What Are the Findings and Implications for Investors and Investment Professionals?
The study brings forward a fresh perspective to the long-lasting debate on the pros and cons of increasing portfolio holdings disclosure. The authors focus on the implications of the disclosure in an environment where disclosure is not mandatory. Thus, they can compare disclosing funds with non-disclosing funds in addition to the circumstances before and after regulation requirements. Despite the broad and multidimensional approach taken by the authors, no convincing evidence emerged that disclosure regulation has an adverse impact on fund performance. This is a fundamental message to governments, regulators, and investors seeking grounds for strengthening disclosure requirements.