Yang Sun

We examine the selection of fund self-declared benchmarks. While the incidence of style mismatched benchmarks is high at the beginning of our sample (41% of fund assets/34% of funds), it declines significantly over time. This decline is driven primarily by existing funds changing their self-declared benchmarks to correctly match their style. In examining why funds ‘correct’ their benchmarks over time, we find that investor learning, institutional investor governance, product market competition and fund company risk management all play a role. Lastly, we find that funds overseen by entrenched managers are more likely to use a mismatched benchmark

The rise of Target Date Funds (TDFs) has moved a significant share of retail investors into contrarian trading strategies that rebalance between stocks and bonds so as to maintain age-appropriate portfolio shares. We show that i) TDFs actively rebalance within a few months following differential asset-class returns to maintain stable portfolio shares, ii), this rebalancing drives contrarian rebalancing flows across funds held by TDFs, iii) investors do not move funds into or out of TDFs to offset these flows, and iv) these flows impact the prices of stocks. Across otherwise similar stocks, those with higher (indirect) TDF ownership experience lower returns after higher market-wide performance, a results that holds when looking only at variation in TDF ownership driven by S&P index inclusion. Consistent with this price impact, the stock market exhibits more reversion at the monthly frequency during the recent TDF era. Together, our results suggest that continued growth in TDFs may affect return dynamics and the relation between stock and bond returns.
Includes bibliographical references (pages 32-35).