The Journal’s quarterly rankings give a surprisingly heavy boost to mutual funds that make it into the Top 10, according to research by Simon professor Ron Kaniel and coauthor Robert Parham, a current PhD student. They found that the quarterly capital flows of Top 10 funds grew an average of 31 percent more than those of funds just missing the list.
“Even though their ranking and returns are quite close, there’s a big difference between No. 10 and No. 11,” Kaniel says.
WSJ rankings are based simply on the previous 12 months’ returns, ensuring both minimal editorial impact on what to report on and random assignment around the publication cutoff of 10. Because the Category Kings media mention is not the result of new information about a fund’s investment prospects or products, it can be used as a laboratory for understanding how a mere mention in the media can affect financial decision-making, Kaniel says.
A fund’s presence in the Top 10 list in a single ranking period allows it to collect almost $1.5 million in increased fees on average, the authors find. They also see a ripple effect for other funds in the same brand: When considering spillover flows to other funds in the complex, the increased fees from appearance on the list amount to a remarkable $36 million.
Top 10 rankings drive investment decisions by managers of mutual funds that are around the cutoff for making the list. Managers can easily scan the previous year’s results to determine how their funds currently rank, and they know very little separates the performance of a No. 10 fund from one at No. 11.
A month before the quarterly rankings come out, managers of funds around the No. 10 cutoff often distort their portfolio allocation to differentiate themselves from their peers. The goal: to increase the likelihood of making the list. It’s a risky move—the fund shifts to a sub-optimal risk-return tradeoff—but it also betters the fund’s chances of making the list and reaping the significant benefits. Only funds that are unlikely to be in a similar position in the next quarter distort allocations.
Similar rankings published less prominently do not have the same effect on capital flow after publication. The prominence of the Category Kings section is key to driving increased capital flows from investors to the published mutual funds, Kaniel says. —Sally Parker