Academic journal article Journal of Economics and Finance

An Empirical Analysis of the Wall Street Journal's SmartMoney Fund Screen

Academic journal article Journal of Economics and Finance

An Empirical Analysis of the Wall Street Journal's SmartMoney Fund Screen

Article excerpt

(ProQuest: ... denotes formulae omitted.)

1 Introduction

Recent academic papers have established that media coverage and advertising heavily influence investors' stock and mutual fund choices (e.g., Jain and Wu 2000;Cronqvist 2006; Barber and Odean 2008; Gallaher, Kaniel, and Starks 2009), and work by Tetlock (2007) emphasizes the influence that the Wall Street Journal has on the investment community. Late in 2004, the WSJ began to publish a column entitled "SmartMoney Fund Screen," which provides a list of mutual funds based on specific criteria such as fund objective, historical returns, and expense ratios. The majority of the published funds are diversified domestic stock funds, but 40 % of the funds represent other mutual fund classifications such as sector funds, international funds, hybrid funds, and fixed income funds. The column does not explicitly recommend that individuals invest in the listed funds. But, it is likely that many investors view the list as implicitly recommending funds that are most likely to perform the best in the future. At a minimum, with so many mutual funds available to investors, the list serves to attract media attention to the funds and to reduce consumers' search costs.

In this study, we examine whether the SmartMoney Fund Screen is able to provide value to investors by correctly forecasting which mutual funds will outperform over the subsequent year. We first examine the pre and post publication performance of the funds using various benchmarks that are appropriate given the objective of the published funds. As a second step, we examine the forecasting performance of the SmartMoney Fund Screen relative to the performance of the Morningstar star rating system. As demonstrated by DelGuercio and Tkac (2008), the Morningstar rating system is extremely popular and influential among individual and institutional investors, and previous studies provide evidence of the positive forecasting ability of the Morningstar system. Specifically, Morey and Gottesman (2006) provide evidence that funds which have Morningstar's highest rating of five stars generate superior future performance relative to lower rated funds, and DelGuercio and Tkac (2008) find that following a trading strategy of investing in only five star rated funds produces positive risk adjusted returns out of sample. Thus, given Morningstar's dominance in the field, we examine the value of the SmartMoney Fund Screen recommendations in both absolute terms and in terms of their value as an alternative to the Morningstar star system.

We examine 1485 mutual funds published in the WSJ's "SmartMoney Fund Screen" column from September 7, 2004 to July 14, 2009 when the column was discontinued in the newspaper but remained available to subscribers through the website. We find that despite the availability of enough five star funds to compose their entire listings, only 35 % of the SmartMoney funds have a Morningstar five star rating. The largest percentage of funds (42 %) has a four star rating while 18 % of funds have a three star rating.

We use daily fund returns and three different measures to estimate fund performance. We find that on average, the published funds generate positive and significant performance measures during the year before publication which is consistent with viewing the SmartMoney screen as providing implicit recommendations of funds for investors. Excess returns relative to a market wide benchmark average 5.75 % while the average annualized fund alpha is 2.61 %. In the year after publication, there is a statistically significant decline in performance. Excess returns fall on average by -5.38 % while average annualized alpha turns negative. These results hold in absolute terms and conditional on the fund's Morningstar rating. In addition, these results hold across fund classifications.

We then directly compare the SmartMoney funds to Morningstar. Since investors could choose a five star Morningstar fund instead of the SmartMoney fund, for each SmartMoney fund, we select a five star Morningstar fund that has the same prospectus objective and the closest expense ratio in absolute terms. …

Search by... Author
Show... All Results Primary Sources Peer-reviewed


An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.