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Journal of Finance Vol. 76 No. 4 2021

Don't Take Their Word for It: The Misclassification of Bond Mutual Funds

Huaizhi Chen1; Lauren Cohen1,2,3,4,5; Umit G. Gurun1,2,6,3,7,5

1 University of Notre Dame · 2 National Bureau of Economic Research · 3 Vanderbilt University · 4 Boston Public Library · 5 Rice University · 6 The University of Texas at Dallas · 7 China Nonferrous Metals Changsha Investigation Design Institute

open access

Abstract

We provide evidence that bond fund managers misclassify their holdings, and that these misclassifications have a real and significant impact on investor capital flows. The problem is widespread, resulting in up to 31.4% of funds being misclassified with safer profiles, compared to their true, publicly reported holdings. “Misclassified funds”—those that hold risky bonds but claim to hold safer bonds—appear to on‐average outperform lower risk funds in their peer groups. Within category groups, misclassified funds receive more Morningstar stars and higher investor flows. However, when we correctly classify them based on actual risk, these funds are mediocre performers.

DOI
10.1111/jofi.13023
Volume
76
Issue
4
Pages
1699-1730
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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