What Does a Mutual Fund's Average Credit Quality Tell Investors?
By: Geng Deng, Craig McCann, and Edward O'Neal (Nov 2009)
Published in the Journal of Investing, Winter 2010, Vol. 19, No. 4: pp. 58-65.
The SLCG study explains that the Average Credit Quality statistic as typically calculated by the mutual fund companies and by Morningstar significantly overstates bond mutual funds' true credit quality. This statistic is based on Standard & Poor's and Moody's assessment of the credit risk of the individual bonds in the portfolio and is reported to mutual fund investors using the familiar letter scale for rating the credit risk of bonds.
The study concludes that, for instance, funds that have the credit risk of a portfolio of BBB-rated bonds often report an Average Credit Quality of A or even AA and that given how this statistic is calculated, portfolio managers can easily manipulate their holdings to significantly increase their credit risk and thereby their yield without increasing their reported credit risk at all. Since bond fund managers compete for investors based on yield and risk, the authors find that fund managers who report Average Credit Quality have the ability and the incentive to increase but underreport the credit risk in their bond mutual fund portfolios.
Concentrated Investments, Uncompensated Risk and Hedging Strategies
By: Craig McCann and Dengpan Luo (Dec 2004)
In this paper, Dr. McCann and Dr. Luo explore the risk of holding concentrated investments and explain and evaluate risk management strategies.
The Use of Leveraged Investments to Diversify a Concentrated Position
By: Craig McCann and Dengpan Luo (Jun 2004)
Published in the Securities Arbitration 2004 Handbook PLI.
Brokerage firms recently recommended that investors holding a concentrated position in a single stock borrow and invest in a portfolio of additional stocks to reduce risk. Dr. McCann and Dr. Luo demonstrate that this strategy to reduce risk predictably did exactly the opposite.
Churning - Revisited: Trading Cost and Control
By: Craig McCann and Dengpan Luo (Sep 2003)
Published in the Securities Arbitration 2003 Handbook PLI.
In a previous paper, Dr. McCann outlined the portfolio approach to assessing the excessiveness of trading in churning cases. In this paper, Dr. McCann and Dr. Luo demonstrate that cost-to-equity ratios of more than 4 or 5% or commission to equity ratios of 2 or 3% in accounts with turnover ratios of 2 indicate excessive trading in common stock portfolios.
Detecting Personal Trading Abuses
By: Craig McCann (Jun 2003)
Recent actions by the New York State Attorney General have highlighted abusive personal trading practices by mutual fund portfolio managers. In this paper, Dr. McCann explains how abusive personal trading practices, including those most recently identified, can be detected in a simple, cost effective manner.
The Suitability of Exercise and Hold
By: Craig McCann and Dengpan Luo (Jun 2002)
Hundreds of lawsuits are currently working their way through the courts and arbitration panels over a strategy referred to as exercise and hold. The advice to exercise employee stock options and hold the acquired stock is essentially advice to acquire and maintain a concentrated position. As such, the advice to exercise and hold can be evaluated within the familiar suitability framework.
Churning
By: Craig McCann (Dec 2001)
In this paper, Dr. McCann improves upon traditional indicators of churning and demonstrates that, properly calculated, the trading costs estimate of damages closely parallels the well-managed theory, or benchmark portfolio, estimate of damages.
Bid-Ask Spread, Sales Credits and Brokers' Compensation
By: Craig McCann and Richard G. Himelrick (Jun 2001)
In this working paper, co-authored with Richard Himelrick, Esq., Dr. McCann explains the role of market makers and the provision of sales credits as a basis for brokers' compensation.
McCann On Trading Models
By: Craig McCann (Jun 2000)
Stock trading models are used by economists to estimate damages in securities class action lawsuits. In this note, we explain the three types of models used by plaintiffs' and defendants' experts.
