Three Consultants Attack Bond Funds for 'Systematically' Misreporting Their Foci
Reported by Neil Anderson, Managing Editor
After several ultra-short bond funds faced dramatic losses, several consultants have launched an attack on the mutual fund industry's description of bond funds. Geng Deng, Craig McCann and Edward O'Neal of Securities Litigation and Consulting Group claim in a new report many so-called short-term bond funds were actually investing like long-term ones.
"Mutual funds systematically misreport the term of the bonds in their portfolios, providing an opportunity for portfolio managers to significantly increase their risk, credit risk in particular, by holding very long-term bonds while claiming to expose investors to only the risks of very short-term bonds," the trio assert via "What Does a Mutual Fund's Term Tell Investors?"
McCann and O'Neal are both ex-professors and ex-SEC economists.
Company Press Release
WASHINGTON, April 15 -- Securities Litigation and Consulting Group, Inc. ("SLCG") has issued a study, "What Does a Mutual Fund's Term Tell Investors?", reporting that in recent years many bond funds marketed as short-term bond funds were, in fact, long-term bond funds. The report's primary authors are Geng Deng, Craig McCann and Edward O'Neal. Dr. Deng is a Senior Financial Mathematician and Dr. McCann and Dr. O'Neal are Principals of SLCG. Dr. McCann and Dr. O'Neal are former professors and Securities and Exchange Commission economists.
The SLCG study claims that mutual funds systematically misreport the term of the bonds in their portfolios, providing an opportunity for portfolio managers to significantly increase their risk, credit risk in particular, by holding very long-term bonds while claiming to expose investors to only the risks of very short-term bonds.
The study also reports that Morningstar uses a statistic -- the average effective duration -- provided by the mutual funds companies to classify bond mutual funds as ultra short-term, short-term, intermediate-term or long-term even though that statistic only measures the sensitivity of the portfolios' bond holdings to changes in risk free interest rates. Mutual funds have figured out how to hold long-term bond portfolios with significant credit risk and still be classified as ultra short-term and short-term bond funds. SLCG shows that extraordinary losses suffered by these funds in 2008 can be explained by the how much the bond funds' weighted average maturity exceeded the maturities typically expected in short-term bond funds.
This study and other working papers are available at http://www.slcg.com/research.php.
Securities Litigation and Consulting Group, Inc. ("SLCG") is a financial economics consulting firm based in the Virginia suburbs outside of Washington, DC. SLCG provides consulting services and expert witnesses to law firms, publicly-traded corporations, banks, brokerage firms and individuals involved in complex litigation throughout the United States. SLCG's staff includes PhD, MA and BA level professionals with academic, industry and government experience. Its experts have testified in state and federal court and in various arbitration forums.
For further information about SLCG or its research, please contact Dr. Geng Deng at 703-890-0741 and gengdeng@slcg.com, Dr. Craig McCann at 703-246-9381 and craigmccann@slcg.com or Dr. Edward O'Neal at 336-655-8718 and eddieoneal@slcg.com or visit us at http://www.slcg.com.
SOURCE Securities Litigation and Consulting Group, Inc.
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