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Mutual funds change their risk levels significantly over time. This paper investigates the performance consequences of risk shifting, as well as the economic motivations and the mechanisms of risk shifting. Using a holdings-based measure of risk shifting, we find that funds that increase risk perform worse than funds that keep stable risk levels over time. In addition, funds that expect higher benefits from risk shifting are more likely to increase risk and perform particularly poorly after increasing risk. Our results are consistent with the notion that agency problems, rather than the ability to take advantage of changing investment opportunities, are the likely motivation behind risk shifting behavior.

Zonder onderwerpscode: economie

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Investment taxes have a substantial impact on the performance of taxable mutual fund investors. Mutual funds can reduce the tax burdens of their shareholders by avoiding securities that are heavily taxed and by avoiding realizing capital gains that trigger higher tax burdens to the funds' investors. Such tax avoidance strategies constrain the investment opportunities of the mutual funds and might reduce their before-tax performance. Our paper empirically investigates the costs and benefits of tax-efficient asset management based on U.S. equity mutual funds. We find that mutual funds that follow tax-efficient asset management strategies generate superior after-tax returns. Surprisingly, more tax-efficient mutual funds do not underperform other funds before taxes, indicating that the constraints imposed by tax-efficient asset management do not have significant performance consequences.

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• Reference Manager
• EndNote
• RefWorks (Direct export to RefWorks)

Mutual funds change their risk levels significantly over time. This paper investigates the performance consequences of risk shifting, as well as the economic motivations and the mechanisms of risk shifting. Using a holdings-based measure of risk shifting, we find that funds that increase risk perform worse than funds that keep stable risk levels over time. In addition, funds that expect higher benefits from risk shifting are more likely to increase risk and perform particularly poorly after increasing risk. Our results are consistent with the notion that agency problems, rather than the ability to take advantage of changing investment opportunities, are the likely motivation behind risk shifting behavior.