Termination Risk, Multiple Managers and Mutual Fund Tournaments

This study analyzes the risk-taking behavior of mutual fundsin response to their relative performance over the 1992 to 1999period. Our results show that managers of funds whose performanceis closer to that of the top performing funds have greater incentivesto increase their portfolios' risk than managers at the topwho exhibit a tendency to lock in their positions. The evidencesuggests that termination risk imposes a constraint on the risktaking behavior of underperforming fund managers and the winnertakes all phenomenon generates a strong incentive for the fundmanagers to be the top manager. We also analyze the differencein the risk taking behavior of funds managed by multiple managersand single managers. JEL Classification codes: G2 L2     

Risk-taking and performance of government bond mutual funds

This paper investigates the risk exposures of government bond mutual funds and how risk-taking behavior affects fund performance. Government bond mutual funds often outperform their respective benchmark bond indexes before but not after adjusting for bond market risk factors. We show that the risk-taking behavior of fund managers helps to explain the different performances of government bond funds with and without controlling for the risk factors. Our results suggest that risk-taking leads to higher returns relative to benchmarks in normal risk periods but lower returns in high risk periods, suggesting that fund managers consistently take risky bets in fund management. We further show that the risk-taking of government bond funds is persistent and that investors typically have no ability to differentiate between the skill and risk components of fund performance. These findings suggest why fund managers have incentives to take consistently risky positions.     

我国开放式基金绩效及选股和择时能力研究

近年来,开放式基金逐渐成为我国基金市场的绝对主体。开放式基金能否取得较好的绩效受到市场的普遍关注。本文选取了资金管理规模前20位的公司,并从中随机挑选1只基金,运用詹森指数、特雷诺比率、夏普指数和信息比率等单因素模型和Fama-French三因素模型对开放式基金的绩效进行分析,并使用T-M模型、H-M模型、C-L模型对基金经理人股票选股与择时能力进行分析。结果发现:第一,我国开放式基金经理的选股能力存在时变性,在上升期具备选股能力,在下跌期不具备选股能力,而无论是在上升期还是下跌期,基金经理普遍不具备择时能力。第二,在市场上升期基金经理比较注意对风险的把控,系统性风险较小,而在下跌期基金投资组合的系统性风险明显上升,基金经理冒险意愿上升,当市场出现大幅度下跌时,其不理性行为会加剧市场的波动。本文的研究结论有利于提升投资者的风险意识和理性意识、促进外部监管部门的精准监管审查,并能够激励基金经理人提高自身风险管控的能力。     

Portfolio concentration and fund manager performance

This research examines the relationships among portfolio concentration, fund manager skills, and fund performance in Taiwan's equity mutual fund industry, yielding several empirical findings as follows. First, after controlling for other factors, concentrated equity funds tend to have smaller net asset values, larger fund flows, higher turnover rates, and a younger age and prevail in smaller fund families. Second, concentrated fund managers buy and sell stocks more smartly based on economic trends or market factors than do diversified fund managers, i.e., they have better market‐timing abilities. Third, only partial evidence supports the premise that concentrated equity funds have better next‐quarter risk‐adjusted performances than do diversified ones, as these fund managers' skills positively correlate to risk‐adjusted fund performance. Fourth, fund managers who have better stock‐picking abilities and intensively invest in certain industries generally exhibit better Carhart's alpha in the next quarter than do other fund managers. Fifth, fund managers' stock‐picking abilities more closely relate to long‐term performance than do their market‐timing abilities. Lastly, positive performance persistence is much stronger than negative performance persistence, but concentrated funds do not have stronger performance persistence than do diversified funds.     

What impact does a change of fund manager have on mutual fund performance?

Using a unique database of UK fund manager changes over the period from 1997 to 2011, we examine the impact of such changes on fund performance. We find clear evidence to suggest that a manager change does affect the benchmark-adjusted performance of UK mutual funds. In particular we find a significant deterioration in the benchmark-adjusted returns of funds that were top performers before the manager exit and, conversely, a significant improvement in the average benchmark-adjusted returns of funds that were poor performers before the manager exit. Our use of the Carhart's (1997) four-factor model reveals that the improvement in average post manager exit performance is accompanied by a reduction in market risk, a slight reduction in exposure to small cap stocks, and an increase in exposure to value and momentum stocks. Overall, our results suggest that UK fund management companies have been relatively successful in replacing bad managers with better managers, but relatively unsuccessful at finding equivalent replacements for their top performing managers. We believe that regulators should therefore try to ensure that all efforts are made by fund management companies to inform all of their investors about a change in management.     

Can Mutual Fund “Stars” Really Pick Stocks? New Evidence from a Bootstrap Analysis

We apply a new bootstrap statistical technique to examine the performance of the U.S. open‐end, domestic equity mutual fund industry over the 1975 to 2002 period. A bootstrap approach is necessary because the cross section of mutual fund alphas has a complex nonnormal distribution due to heterogeneous risk‐taking by funds as well as nonnormalities in individual fund alpha distributions. Our bootstrap approach uncovers findings that differ from many past studies. Specifically, we find that a sizable minority of managers pick stocks well enough to more than cover their costs. Moreover, the superior alphas of these managers persist.     

TEMPORAL CHANGES IN THE DETERMINANTS OF MUTUAL FUND FLOWS

We examine how the relation between mutual fund performance and fund flows has changed over time by separating our sample into two periods (1978–87 and 1988–97). We document an increase in the flow‐performance asymmetry in the second period that exacerbates the adverse incentive for fund managers to increase portfolio risk. We develop a measure of the elasticity of fund flows with respect to performance, which filters out the confounding influence of greater aggregate fund flows in the second period and allows an examination of whether current investors place more emphasis on prior performance when selecting funds. We conclude that, though top performing funds are rewarded with greater fund flows in the second half of our sample, the change is due solely to the increase in aggregate fund flows and not to an increased reliance on performance by individual fund investors. JEL classification: G1, G2, L1.     

Do Female Mutual Fund Managers Manage Differently?

We examine the performance and investment behavior of female fixed‐income mutual fund managers compared with male fixed‐income mutual fund managers. We find that male‐ and female‐managed funds do not differ significantly in terms of performance, risk, and other fund characteristics. Our results suggest that differences in investment behavior often attributed to gender may be related to investment knowledge and wealth constraints. Despite the similarities between male and female managers, we find evidence that gender influences the decision making of mutual fund investors. We find that the net asset flows into funds managed by females are lower than for males, especially for the manager's initial year managing the fund.     

Testing the effect of portfolio holdings disclosure in an environment absent of mandatory disclosure

This study examines a number of portfolio disclosure regimes with respect to accuracy and susceptibility to copycat behaviour in an environment absent of mandatory disclosure. We find that periodic portfolio disclosure tends to underestimate true excess performance as well as idiosyncratic risk in top‐quartile fund managers, with longer inter‐reporting intervals tending to result in greater differences. ‘Copycat funds’ following the disclosed holdings of top‐tier managers significantly underperform the underlying fund, while copycats following bottom‐tier managers significantly outperform the underlying fund. Our findings suggest that periodic reporting at monthly intervals or longer would not affect fund alpha generation.     

Behavioural analysis of socially responsible investment managers: specialists versus non-specialists

We analyse the performance and performance persistence of US socially responsible investment (SRI) managers from a managers’ perspective, differentiating between specialist managers (only running SRI mutual funds) and non-specialists (running SRI and conventional mutual funds). We find that the SRI fund nature has a significantly negative influence on the non-specialist performance. Furthermore, top managers of both groups persistently outperform SRI funds. However, non-specialist managers obtain superior performance to specialist managers, perhaps because of learning synergies in both fund niches. Results also show more persistence with non-specialists, especially with regard to conventional mutual funds.     

Employment risk,compensation incentives,and managerial risk taking: Evidence from the mutual fund industry

We examine the influence on managerial risk taking of incentives due to employment risk and due to compensation. Our empirical investigation of the risk taking behavior of mutual fund managers indicates that managerial risk taking crucially depends on the relative importance of these incentives. When employment risk is more important than compensation incentives, fund managers with a poor midyear performance tend to decrease risk relative to leading managers to prevent potential job loss. When employment risk is low, compensation incentives become more relevant and fund managers with a poor midyear performance increase risk to catch up with the midyear winners.     

The timing ability and global performance of Tunisian mutual fund managers: A multivariate GARCH approach

It is well-established in the financial literature that the global performance of mutual fund managers is the result of two skills: selectivity and market timing. This paper examines whether the multivariate Generalized Autoregressive Conditional Heteroskedasticity (GARCH) approach improves our perception of the global performance of fund managers compared with the unconditional approach and the conditional approach based on instruments. We find strong evidence that the multivariate GARCH method makes mutual fund performance looks better relative to the existent approaches, but this improvement in the global performance does not mean necessarily that mutual funds outperform traditional benchmarks. Indeed, mixed mutual funds yield neutral performance relative to benchmarks, whereas bond mutual funds generate significant positive global coefficients. The strong performance of bond fund managers comes from their ability to pick profitable bonds, not from their ability to time the market. Also, the empirical tests highlight that the best (worst) bond funds in the past remain at the top (bottom) of the ranking in the following years. These findings suggest that the Tunisian bond market presents strong opportunities for sophisticated investors.     

Strategic behavior within families of hedge funds

The paper investigates the strategic behavior of hedge fund families. It focuses on decisions to start and liquidate family-member funds. Hedge fund families tend to liquidate funds that underperform compared to other member funds, and to replace them by new ones. By choosing a launch time after a short period of superior performance by their member funds, families extend the spillover to new funds. Hedge fund families seem to be more experienced in promoting their funds and attracting fund inflow than in generating superior performance. This results in higher dollar compensation earned by managers within multi-fund families than in stand-alone funds.     

A review of behavioural and management effects in mutual fund performance

This paper surveys and critically evaluates the literature on the role of management effects and fund characteristics in mutual fund performance. First, a brief overview of performance measures is provided. Second, empirical findings on the predictive power of fund characteristics in explaining future returns are discussed. Third, the paper reviews the literature on fund manager behavioural biases and the impact these have on risk taking and returns. Finally, the impact of organizational structure, governance and strategy on both fund risk taking and future performance is examined. While a number of surveys on mutual fund performance are available, these have not focused on the role of manager behavioural biases, manager characteristics and fund management strategic behavior on fund performance and risk taking. This review is an attempt to fill this gap. Empirical results indicate that finding successful funds ex-ante is extremely difficult, if not impossible. In contrast, there is strong evidence that poor performance persists for many of the prior “loser fractile” portfolios of funds. A number of manager behavioural biases are prevalent in the mutual fund industry and they generally detract from returns.     

Incentives and risk taking in hedge funds

We study how incentive fees and manager’s own investment in the fund affect the investment strategy of hedge fund managers. We find that loss averse managers increase the risk of the fund’s investment strategy with higher incentive fees. However, risk taking is greatly reduced if a substantial amount of the manager’s own money (at least 30%) is in the fund. Using the Zurich hedge fund universe, we test the relation between risk taking and incentive fees empirically. Hedge funds with incentive fees have significantly lower mean returns (net of fees), while downside risk is positively related to the incentive fee level. Fund of funds charging large incentive fees achieve relatively high mean returns, but with significantly higher risk as well.     

The performance of female hedge fund managers

Using data for the period 1994–2013, we examine the return and risk-taking behavior of hedge funds having at least one female portfolio manager and funds that have all female portfolio managers. Funds with all female managers perform no differently than all male-managed funds and have similar risk profiles. For single-style funds, those with mixed teams of both genders underperform male-only funds on both a raw and risk-adjusted basis, although mixed funds incur less risk and their Sharpe ratios do not differ. For funds of funds, both all-female and mixed funds have similar performance to male-managed funds. We then consider the failure rate across all fund styles. Funds with at least one female manager fail at higher rates, driven by difficulty in raising capital—these funds are smaller and are less likely to be closed to new investment. Surviving funds with at least one female manager have better performance than male-managed surviving funds, consistent with the idea that female managers need to perform better for their funds to survive. Yet, female-managed surviving funds have fewer assets under management than surviving male-managed funds. Using media mentions as a proxy for investor interest, female-managed funds receive proportionately less attention. Our results suggest that there are no inherent differences in skill between female and male managers, but that only the best performing female managers manage to survive.     

Pension fund manager skills over the economic cycle: the (non-)specialization cost

We study whether pension fund managers, as professionals of important social and financial products, are able to add value for their clients and adapt to economic changes. To this end, we analyze the performance and skills (market timing and stock picking) over the economic cycle from both pension fund and manager perspectives. This double analysis allows examining whether skills reside in managers and/or funds and control for manager substitutions. Despite the long-term nature of pension funds, we find that both fund and manager skills vary with market conditions, showing better evidence of stock-picking in booms, and of market timing in recessions. Nonetheless, top (bottom) funds and managers exhibit both (incorrect) skills in booms and in recessions. Some of the top (bottom) funds and managers are the best (worst) in both abilities in the same periods, but not in different periods, showing that not all managers have the ability to adapt to market conditions. Additionally, managers with limited skills tend to specialize because diversification requires multi-task skills and the non-specialization of these managers usually results in incorrect skills.     

International mutual fund selectivity and market timing during up and down market conditions

This study examines the selectivity and market-timing ability of international mutual fund managers. Ninety-seven international mutual funds with a minimum of five-year return history selected from the Morningstar OnDisc database are analyzed. Our findings suggest that managers of international mutual funds possess good selectivity and overall performance. We also find weak evidence of poor market-timing ability. Consistent with prior findings from domestic mutual funds, there is a negative correlation between the international fund managers' selection ability and market-timing ability. Finally, managers for Europea funds show poorer performance than those managing the other three international fund groups.     

Global equity fund performance, portfolio concentration, and the fundamental law of active management

This paper investigates the relation between portfolio concentration and the performance of global equity funds. Concentrated funds with higher levels of tracking error display better performance than their more broadly diversified counterparts. We show that the observed relation between portfolio concentration and performance is mostly driven by the breadth of the underlying fund strategies; not just by fund managers’ willingness to take big bets. Our results indicate that when investors strive to select the best-performing funds, they should not only consider fund managers’ tracking-error levels. More important is that they take into account the extent to which fund managers carefully allocate their risk budget across multiple investment strategies and have concentrated holdings in multiple market segments simultaneously.     

基金业绩排名与基金经理的冒险行为

本文利用2005-2010年间开放式股票型和混合型基金的数据,研究年度基金业绩排名对基金经理冒险行为的影响。与相对业绩排名激励机制会导致基金经理过度冒险的假设相一致,本文发现,年中业绩排名靠后的基金经理(输家)在下半年提高所持有资产组合的风险的程度要大于年中业绩排名靠前的基金经理(赢家)。进一步研究发现,基金经理提高下半年所持有资产组合的风险并不能显著提高下半年基金的业绩。特别是在熊市中,提高下半年所持有资产组合的风险反而显著降低了基金下半年的业绩。