E&M Chair Hooks Co-Authors Paper with Erdman, '14

Conclusions on mutual-fund pricing drawn from two decades of research

December 1, 2014 | By John Perney

Professor Jon Hooks recently experienced a return on investment that is a little harder to quantify. That said, like many financial instruments, it matured over time.

The chair of the Albion College Economics and Management Department is the lead author of a paper on mutual fund discount prices titled "Turnover and Closed-End Fund Discounts," published in the latest issue of the Journal of Business & Economics Research.

Among the study's clearest findings was a confirmation of a primary Hooks hypothesis: that a higher amount of portfolio turnover within a mutual fund corresponds with a more highly discounted selling price, presumably because the increase in turnover results in increased fund expenses (manager's fees, taxes, etc., from the buying and selling of individual stocks) without significantly increasing the value of the fund. Demand for the fund decreases as a result, leading to the discounted selling price.

According to Hooks, a lot of research was needed to accumulate sufficient data to perform proper calculations and draw reliable conclusions. Twenty years' worth of research.

"I started collecting data in 1994," he said. "I worked on and off on the theory and data entry since that date. Sarah and I determined that we had enough data points in 2013 and began the econometric work."

Hooks is referring to Sarah Erdman, '14, who graduated summa cum laude and Phi Beta Kappa with degrees in mathematics and economics and management. She is currently an analyst at Ernst and Young's Dallas, Texas, office.

"Dr. Hooks had been compiling data for years, and I was glad I could contribute to the data analysis and help see the project through to completion," said Erdman, adding that her work as a research assistant "was the most beneficial thing I did during my time at Albion. Even the basic data-crunching and analysis gave me access to many programs and applications widely used within the industry."

According to Hooks, the years of data that reached into decades were necessary to make up for the small cross-section of funds used in the study.

"It, of course, felt good to finally publish research that had been in the works for so long," he said. "While the project was often put off for those with more pressing deadlines, it was still a lot of work over the years. It was also great to work with someone as dedicated as Sarah and be able to publish it with her."