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.     

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。     

Do Portfolio Manager Contracts Contract Portfolio Management?

Most mutual fund managers have performance‐based contracts. Our theory predicts that mutual fund managers with asymmetric contracts and mid‐year performance close to their announced benchmark increase their portfolio risk in the second part of the year. As predicted by our theory, performance deviation from the benchmark decreases risk‐shifting only for managers with performance contracts. Deviation from the benchmark dominates incentives from the flow‐performance relation, suggesting that risk‐shifting is motivated more by management contracts than by a tournament to capture flows.     

Asset Allocation and Selectivity of Asian Mutual Funds During Financial Crisis

This paper evaluates the ability of US-based Asian mutual fund managers in coping with the 1997 Asian financial crisis. We find that the actively managed mutual funds under-perform with respect to the market portfolio by 1.71% in average monthly return. Such poor performance is caused by fund managers' relative weakness in country selection as well as in stock picking. Fund managers are also found to be more skillful in picking the correct market when the market is going up than going down. Our results are consistent with the literature that asset allocation in Asian mutual funds is a dominating factor relative to selectivity in explaining fund returns during the financial crisis. In addition, there exists a negative relation between asset allocation ability and selectivity of fund managers.     

Mutual Fund Managers’ Prior Work Experience and Their Investment Skill

This paper examines the relationship between mutual fund managers’ past professional backgrounds and their portfolio performance using Chinese mutual fund data from 2003 to 2016. We focus on managers with prior work experience either as industry analysts or as macroanalysts. We hypothesize that managers who worked as industry analysts exhibit superior stock picking skills, while managers with a background as macroanalysts time the market better. These hypotheses are supported by the data after controlling for observable fund and manager characteristics. Bootstrap analyses suggest that a significant difference in performance between these two types of managers cannot be attributed purely to luck.     

Do mutual fund managers time market liquidity?

This paper examines mutual fund managers' ability to time market-wide liquidity. Using the CRSP mutual fund database, we find strong evidence that over the 1974–2009 period, mutual fund managers demonstrate the ability to time market liquidity at both the portfolio level and the individual fund level. Liquidity timing predicts future fund performance and the difference in the risk-adjusted returns between top and bottom liquidity-timing funds is approximately 2% per year. Funds exhibiting liquidity-timing ability tend to have longer histories, higher expense ratios, and higher turnover rates.     

Optimal Number of Stock Holdings in Mutual Fund Portfolios Based on Market Performance

Among the decisions that most mutual fund portfolio managers make is the number of stocks to hold. We posit that there is an optimal number of stocks for each mutual fund, reflecting the trade‐off between diversification benefits versus transactions and monitoring costs. We find a significant quadratic relation between number of stock holdings and risk‐adjusted returns for U.S. equity mutual fund portfolios during 1992–2000. Moreover, we find that changes in the number of stocks held over time are more highly correlated with mutual fund flows than with funds' investment returns.     

Is Concentration a Good Idea? Evidence from Active Fund Management

In this paper, we examine whether mutual fund managers in Taiwan produce superior performance through concentrated investment strategy, and find that mutual funds with higher degree of concentration have higher investment performance and lower risk during the period 2001–2009. Moreover, when the degree of industry concentration of fund holdings is higher, there is less impact on stock market performance. However, the premium of the market portfolio has more impact on the performance of funds when there is lower degree of industry concentration. We also find that the stock-picking and market-timing abilities of mutual fund managers result in funds with high degree of industry concentration having more returns and lower risks than the funds with low degree of industry concentration.     

Measuring bond mutual fund performance with portfolio characteristics

This paper studies the performance of U.S. bond mutual funds using measures constructed from a novel data set of portfolio weights. Active fund managers exhibit outperformance before costs and fees generating, on average, gross returns of 1% per annum over the benchmark portfolio constructed using past holdings (approximately the same magnitude as expenses and transaction costs combined). This suggests that fund managers are able to earn back their fees and costs. There is evidence of neutral ability to time different portfolio allocations (sector, credit quality, and portfolio maturity allocations) and only a subgroup of bond funds exhibit successful timing ability. One performance measure based on portfolio holdings predicts future fund performance and provides information not contained in the standard measures. These results provide the first evidence of the value of active management in bond mutual funds.     

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.     

On the Industry Concentration of Actively Managed Equity Mutual Funds

Mutual fund managers may decide to deviate from a well‐diversified portfolio and concentrate their holdings in industries where they have informational advantages. In this paper, we study the relation between the industry concentration and the performance of actively managed U.S. mutual funds from 1984 to 1999. Our results indicate that, on average, more concentrated funds perform better after controlling for risk and style differences using various performance measures. This finding suggests that investment ability is more evident among managers who hold portfolios concentrated in a few industries.     

A comparative performance of conventional and Islamic unit trusts: Market timing and persistence evidence

It is expected that the returns and resistance of Islamic mutual funds will be different from conventional mutual funds as the former have limited choices for portfolio diversification. This article analyses the performance of conventional and Islamic unit trusts for the period February 1995 to July 2012 in the Malaysian market, one of the most developed Islamic mutual fund markets. The performance analysis is based on four parameters: (i) risk-adjusted returns of unit trusts; (ii) market timing abilities; (iii) selection performance; and (iv) persistence. The results of this study suggest that the returns of both conventional and Islamic unit trusts have outperformed the market throughout the sample period. The results for market timing and selectivity are mostly the same for both categories of funds. However, Islamic unit trusts seem to have better resistance to market downturn than conventional unit trusts. The results of this research can be used by investors to identify funds or create portfolios that are more suitable for a recessionary scenario and for fund managers to better manage their portfolio performance during times when markets are likely to fall. The findings in this article are highly relevant for policymakers, investors and fund managers to determine policy matters, deciding on investment and marketing strategy for Islamic mutual funds.     

The Persistence of Mutual Fund Performance

This paper analyzes how mutual fund performance relates to past performance. These tests are based on a multiple portfolio benchmark that was formed on the basis of securities characteristics. We find evidence that differences in performance between funds persist over time and that this persistence is consistent with the ability of fund managers to earn abnormal returns.     

Best-performing US mutual fund families from 1993 to 2008: Evidence from a novel two-stage DEA model for efficiency decomposition

When analyzing relative performance, especially at the institutional level, the traditional data envelopment analysis (DEA) models do not recognize vastly different and important activities as separate functions and therefore cannot identify which function may be the main source of inefficiency. We propose a novel two-stage DEA model that decomposes the overall efficiency of a decision-making unit into two components and demonstrate its applicability by assessing the relative performance of 66 large mutual fund families in the US over the period 1993–2008. By decomposing the overall efficiency into operational management efficiency and portfolio management efficiency components, we reveal the best performers, the families that deteriorated in performance, and those that improved in their performance over the sample period. We also make frontier projections for poorly performing mutual fund families and highlight how the portfolio managers have managed their funds relative to the others during financial crisis periods.     

Mutual fund liquidity timing ability in the higher moment framework

Using mutual fund data in Thailand, this study shows that fund managers can time the market-wide liquidity in the higher moment framework. High-performing fund managers demonstrate significantly positive liquidity timing ability, while low-performing fund managers do not. Thus, high-performing fund managers increase (decrease) the funds' exposure to the market during a high (low) market liquidity period, while low-performing fund managers do not show the liquidity timing ability. Moreover, only top-performing bank-related mutual funds possess the liquidity timing ability, supporting the information advantage hypothesis. Nonbank-related funds do not possess the liquidity timing ability at both the aggregate and portfolio levels. Several robustness tests confirm the findings.     

The impact of prior performance on the risk-taking of mutual fund managers

We analyze the impact of prior performance on the risk-taking behavior of mutual fund managers. We contribute to the existing literature by using different measures of risks, a larger data set, and an econometric approach capturing non-linear effects and assigning exact probabilities to the mutual fund managers’ adjustment of behavior. We find that prior performance in the first half of the year has, in general, a positive impact on the choice of the risk level in the second half of the year. Successful fund managers increase the volatility, the beta, and assign a higher proportion of their portfolio to value stocks, small firms, and momentum stocks in comparison to unsuccessful fund managers. Unsuccessful fund manager increase, on average, only the tracking error. We thank an anonymous referee, Bernd Brommundt, Alexander Ising, Stephan Kessler, Axel Kind, Angelika Noll, Jennifer Noll, Ralf Seiz, Stephan Süss, Rico von Wyss, and Andreas Zingg for valuable comments. We acknowledge helpful comments of the participants from the Joint Research Workshop of the University of St. Gallen and the University of Ulm in 2005.     

Small-cap equity mutual fund managers as liquidity providers

This paper examines the relation between the performance of small-cap equity mutual funds and the liquidity characteristics of their asset holdings. We study the trading behavior of fund managers and show that on average, they tend to buy less liquid stocks and sell more liquid stocks. We introduce the notion of net “liquidity creation” by fund managers and examine its role in explaining the cross section of small-cap equity mutual fund returns. Our empirical results show that on average, small-cap mutual fund managers are able to earn an additional 1.5% return per year as compensation for providing such liquidity services to the market.     

Information Diffusion among International Fund Managers: Multicountry Evidence

Investors seeking exposure to global equity markets commonly buy international mutual funds managed by locally based fund managers. How competitive is this form of intermediated investing? We investigate whether international equity fund managers mimic each other's portfolio holdings and analyze the performance implications of these actions. Managers based in the same country have more stocks held in common than those of their peers in other countries. Correlated trading among domestic fund managers contributes significantly to this pattern. Cross‐border managers' portfolio holdings and trades are also relevant to the actions of domestic managers. Stock selection strategies based on mimicry and differentiation both deliver short‐term superior performance. Mimicked sales occur while prices are rising.     

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.     

Reciprocal social influence on investment decisions: behavioral evidence from a group of mutual fund managers

In this paper, I analyze reciprocal social influence on investment decisions in an international group of roughly 2,000 mutual fund managers who invested in companies in the DAX30. Using a robust estimation procedure, I provide empirical evidence that the average fund manager puts 0.69 % more portfolio weight on a particular stock if his or her peers, on average, assign a weight to the corresponding position that is 1 % higher compared to other stocks in the portfolio. The dynamics of this influence on choice of portfolio weights suggest that fund managers adjust their behavior based on the prevailing market situation and are more strongly influenced by others in times of an economic downturn. Analyzing the working locations of the fund managers, I conclude that more than 90 % of the magnitude of influence stems from social learning. Although this form of influence varies a great deal over time, the magnitude of influence resulting from the exchange of opinions is more or less constant.