William & Mary Raymond A. Mason School of Business Professors Vladimir Atanasov and John Merrick, along with their colleague Philipp Schuster of the University of Stuttgart, recently published their study on the pricing of small mortgage security odd lots and special bond-fund investments they label single-fund securities.
The professors argue that both types of investments should be marked at a discount to similar, more widely traded, bonds. Inflated marks boost fund performance statistics and may result in higher Morningstar Ratings and undeserved new investment inflows.
The professors narrowed a list of funds launched since 2010 to just those funds that produced returns well in excess of their benchmark in months when odd lots or single-fund securities were purchased in large quantities. Twelve funds, managing a combined $75 billion in investments, share footprints consistent with performance-enhancing mark inflation.
Atanasov, Merrick, and Schuster shared their preliminary research findings with the SEC in late 2016. The professors published a paper on their full findings in 2019 and updated their work earlier this year. In April, Semper Capital Management LP settled Securities and Exchange Commission claims that its MBS Total Return fund had overstated returns. The firm agreed to pay about $500,000 without admitting or denying the SEC’s findings.
Read more about this study, which was featured in the October 13, 2020 edition of the Wall Street Journal in a piece by Justin Baer. Faculty, staff and students of William & Mary can access the full story for free using the university’s free Wall Street Journal Access membership subscription resource.