Spanish Mutual Fund Misclassification Empirical Evidence

• Published in: Journal of Investing Vol. 14; no. 1; pp. 41 - 51
• Main Authors: Castellanos, Arturo Rodríguez, Alonso, Belén Vallejo
• Format: Journal Article Trade Publication Article
• Language: English
• Published: London Pageant Media 01-04-2005
• Subjects: Classification; Discriminant analysis; Equity; Global funds; Incentives; Investment advisors; Investment policy; Mutual funds; Portfolio performance; Scandals; Securities markets; Studies; Spain
• ISSN: 1068-0896; 2168-8613
• DOI: 10.3905/joi.2005.479388

Because there are so many mutual funds on the market, we would like to use fund classifications as one way to define their characteristics, make comparisons, and evaluate results. Yet there is plenty of evidence that managers manipulate the characteristics of fund portfolios when they have economic incentives to do so. The results of discriminant analysis of the Spanish Securities Market Commission (CNMV) classification of a sample of Spanish mutual funds show that nearly 33% of mutual funds are misclassified. Domestic balanced and global funds are the categories with the greatest disparities; 50% of funds are misclassified. This is a particularly serious result as regards domestic balanced funds, as the majority of misclassified funds should be in a category that has higher risk levels. Current mutual fund classification systems have real difficulty in differentiating fund characteristics and thus in being able to provide an appropriate reference for evaluation and selection of funds. An analysis and acknowledgment of the limitations of current fund classifications and possible new classifications that might perform better are essential if we are to improve information for investors and the entire investment industry.