Asset sales in the mutual fund industry: Who gains?

We analyze gains from intercorporate sales of mutual fund subsidiaries, using mandated SEC disclosures to assess the performance of mutual funds transferred by these transactions. Sellers are financial conglomerates (banks) using equity-based deals to transfer poorly performing funds to highly focused asset management companies. The transferred funds experience significant improvements in risk-adjusted returns, efficiency, and asset growth. These improvements are closely correlated with the gains in wealth to buyers and sellers at deal announcements, indicating the market efficiently capitalizes expected performance improvements. Our results provide evidence that these transactions transfer assets to acquirers better able to manage them, generating gains for fund holders and buyer and seller shareholders.     

An empirical analysis of marginal conditional stochastic dominance

Stochastic dominance is a more general approach to expected utility maximization than the widely accepted mean–variance analysis. However, when applied to portfolios of assets, stochastic dominance rules become too complicated for meaningful empirical analysis, and, thus, its practical relevance has been difficult to establish. This paper develops a framework based on the concept of Marginal Conditional Stochastic Dominance (MCSD), introduced by Shalit and Yitzhaki (1994), to test for the first time the relationship between second order stochastic dominance (SSD) and stock returns. We find evidence that MCSD is a significant determinant of stock returns. Our results are robust with respect to the most popular pricing models.     

Bayesian Alphas and Mutual Fund Persistence

We use daily returns to compare the performance predictability of Bayesian estimates of mutual fund performance with standard frequentist measures. When the returns on passive nonbenchmark assets are correlated with fund holdings, incorporating histories of these returns produces a performance measure that predicts future performance better than standard measures do. Bayesian alphas based on the Capital Asset Pricing Model (CAPM) are particularly useful for predicting future standard CAPM alphas. Over our sample period, priors consistent with moderate to diffuse beliefs in managerial skill dominate more skeptical prior beliefs, a result that is consistent with investor cash flows.     

Pseudo Market Timing and the Long-Run Underperformance of IPOs

Numerous studies document long-run underperformance by firms following equity offerings. This paper shows that underperformance is very likely to be observed ex-post in an efficient market. The premise is that more firms issue equity at higher stock prices even though they cannot predict future returns. Ex-post , issuers seem to time the market because offerings cluster at market peaks. Simulations based on 1973 through 1997 data reveal that when ex-ante expected abnormal returns are zero, median ex-post underperformance for equity issuers will be significantly negative in event-time. Using calendar-time returns solves the problem.     

A CROSS-SECTIONAL REGRESSION TEST OF THE MEAN-VARIANCE EFFICIENCY OF AN AUSTRALIAN VALUE WEIGHTED MARKET PORTFOLIO

This paper tests the Mean-Variance efficiency of a value weighted Australian market portfolio using a multivariate cross-sectional regression approach developed by Shanken (1985). This test methodology is sufficiently powerful to reject the null hypothesis that the market portfolio is ex ante Mean-Variance efficient when test assets are constructed on the basis of size (market capitalisation). However, when test assets are constructed on the basis of industry classification the model is unable to reject the Mean-Variance efficiency of the market portfolio. This test statistic provides some useful diagnostics which are examined in the paper.     

Conditional performance evaluation for German equity mutual funds

We investigate the conditional performance of a sample of German equity mutual funds over the period from 1994 to 2003 using both the beta-pricing approach and the stochastic discount factor (SDF) framework. On average, mutual funds cannot generate excess returns relative to their benchmark that are large enough to cover their total expenses. Compared to unconditional alphas, fund performance sharply deteriorates when we measure conditional alphas. Given that stock returns are to some extent predictable based on publicly available information, conditional performance evaluation raises the benchmark for active fund managers because it gives them no credit for exploiting readily available information. Underperformance is more pronounced in the SDF framework than in beta-pricing models. The fund performance measures derived from alternative model specifications differ depending on the number of primitive assets taken to calibrate the SDF as well as the number of instrument variables used to scale assets and/or factors.     

Who incentivizes the mutual fund manager,new or old shareholders?

This study tests whether mutual fund shareholders continue to trade in response to fund returns after they make their initial investment in fund shares. It decomposes the relationship between fund returns and shareholder flow in a large, proprietary panel of all shareholder transactions in one midsize no-load mutual fund family. Results show that both new and old shareholders buy shares during periods of good returns; however, shareholder outflow is essentially unrelated to fund returns. This lack of a return-sell relationship is not driven by locked-in pension assets, shareholders’ ignorance of ongoing fund returns, or embedded capital gains. However, there is evidence that exchanges between equity funds in the family are related more strongly to returns of the destination fund than to returns of the origination fund. This may indicate that flow between equity mutual funds is driven by shareholders buying new funds rather than selling old funds. Supermarket shareholders are smart insofar as they exchange into funds that subsequently outperform their prior funds during their individual holding periods.     

On Stock Market Returns and Monetary Policy

Financial economists have long debated whether monetary policy is neutral. This article addresses this question by examining how stock return data respond to monetary policy shocks. Monetary policy is measured by innovations in the federal funds rate and nonborrowed reserves, by narrative indicators, and by an event study of Federal Reserve policy changes. In every case the evidence indicates that expansionary policy increases ex-post stock returns. Results from estimating a multi-factor model also indicate that exposure to monetary policy increases an asset's ex-ante return.     

Prudent man or agency problem? On the performance of insurance mutual funds

Active equity mutual funds managed by insurance companies underperform peer funds by over 1% per year. There is no evidence that insurance funds make less risky investments; instead they have lower risk-adjusted returns and their fund flows are less sensitive to performance when they perform poorly. Across insurance funds, those with heavy advertising, directly established by insurers or using parent firms' brandnames, and those whose managers simultaneously manage substantial non-mutual-fund assets, are more likely to underperform. We conclude that insurers' efforts to cross-sell mutual funds aggravate agency problems that erode fund performance.     

The Mismatch Between Mutual Fund Scale and Skill

I demonstrate that skill and scale are mismatched among actively managed equity mutual funds. Many mutual fund investors confuse the effects of fund exposures to common systematic factors with managerial skill when allocating capital among funds. Active mutual funds with positive factor-related past returns thus accumulate assets to the point that they significantly underperform. I also show that the negative aggregate benchmark-adjusted performance of active equity mutual funds is driven mainly by these oversized funds.     

Performance Chasing,Fund Flows and Fund Size in Real Estate Mutual Funds

Real estate mutual funds have grown dramatically in number, size, scope and assets under management over the last 15 years, but little assessment is evident. The present study addresses this limitation. Better prior period performance is associated with greater shares of fund inflows for a period. Returns, however, are negatively associated with increased fund flows and fund size. Investors chase past performance limiting fund managers’ ability to optimize investments. Under normal market conditions, but departing from typical mutual fund performance, real estate mutual fund returns generally exceed relevant benchmarks on a before expenses basis and match benchmark returns after expenses. The ability to meet and exceed benchmark returns, however, does not hold during the financial crisis period. Overall, more established funds are shown to have higher returns while fund turnover is not a determinant of returns.     

How Does Size Affect Mutual Fund Behavior?

If actively managed mutual funds suffer from diminishing returns to scale, funds should alter investment behavior as assets under management increase. Although asset growth has little effect on the behavior of the typical fund, we find that large funds and small‐cap funds diversify their portfolios in response to growth. Greater diversification, especially for small‐cap funds, is associated with better performance. Fund family growth is related to the introduction of new funds that hold different stocks from their existing siblings. Funds with many siblings diversify less rapidly as they grow, suggesting that the fund family may influence a fund's portfolio strategy.     

City size and fund performance

The literature predicts that the average skill level and productivity are higher in larger cities. Prior studies use workers’ wage or education differentials to indirectly link city size and output. This article relates city size and productivity directly, using performance data of U.S. equity mutual funds. On average, funds in financial centers perform better than other funds in terms of both gross and risk-adjusted returns, but this difference is driven only by more experienced managers. Among funds in financial centers there is strong evidence of a positive relation between performance and manager experience in a given city, especially among New York funds. More importantly, we observe performance improvements of the same manager at the same fund in financial centers but not elsewhere. Our tests provide novel evidence of knowledge spillovers and learning in cities.     

The Performance,Asset Allocation,and Investment Style of International Equity Managers

This paper evaluates the performance of 114 international equity managers over the January 1988–December 1997 period. Performance tests are conducted using Sharpe (1966) and Jensen (1968) performance methodologies. The managers are divided into mutual fund (n=54) and separately managed fund (n=60) investment management categories. Each management category is further divided by foreign and world (global) investment objectives. Three major findings are reported. First, international equity managers, on average, were unable to outperform the MSCI World market proxy during the sample period. However, world managers did perform better than their foreign counterparts. Second, geographic asset allocation and equity style allocation decisions enhanced the performance of international managers during the sample period. Third, separately managed funds outperformed mutual funds during the period studied when mutual fund returns are measured net of management fees. The apparent managed performance advantage abates, however, when mutual fund returns are adjusted to include management fees. Thus, we find no significant difference in the performance of the management categories when returns are measured gross of fees.     

Mutual fund trades and the value of contradictory private information

We investigate the performance of mutual funds that trade using private information. These funds are uniquely identified from a set of 2730 funds with 44,315 fund-periods between 1994 and 2005. We compare the alignment of fund trades with brokers’ recommendations, which we regard as “public information” in the universe of informed and uninformed mutual funds. Funds that systematically trade counter to the public information form a homogenous subset of the privately informed funds. By using private information that contradicts the public information, these funds exhibit a superior average performance. After we control for serial correlation in fund returns, we assess this advantage as being an economically significant 1.7% per annum. We also show empirically that smaller funds are better able to capture the benefit of private information.     

Performance persistence of international mutual funds

This study applies the “winner–winner, winner–loser” methodology developed by Brown and Goetzmann, Goetzmann and Ibbotson, and Malkiel to test for short-term performance persistence in international equity mutual funds over the 20-year period from 1977 to 1996. Persistence tests are applied to a database consisting of all international equity funds in existence during this period, varying from a low of 11 (1977) to a high of 473 (1996) funds, reflecting the extremely rapid growth of this asset class over the last 20 years. The authors are not aware of any other persistence studies of international equity funds. The results show statistically significant performance persistence for 1-year holding periods, but no persistence for 2-, 3- or 4-year periods. For 1-year periods, overall, performance persistence is statistically significant at the .001 level. This leads to the conclusion that international equity mutual funds exhibit strong performance persistence for short-term (1-year holding periods), but persistence generally fades after the first year. These results are generally consistent with results found by other researchers using this methodology. Survivorship bias is a concern in virtually all time series studies of mutual fund returns. This bias is minimal in this study because each new fund is added to the database, merging funds continue to be included and adjustments are made for funds that cease operations. The only bias is that if any fund closed and did not merge with an existing fund, that fund would not have returns to be included for the future periods. Only 28 funds ceased operations over the 20-year period during which 490 new funds were introduced.     

Efficiency with costly information: a reinterpretation of evidence from managed portfolios

We investigate the informational efficiency of mutual fund performancefor the period 1965-84. Results are shown to be sensitive tothe measurement of performance chosen. We find that returnson S&P stocks, returns on non-S&P stocks, and returnson bonds are significant factors in performance assessment.Once we correct for the impact of non-S&P assets on mutualfund returns, we find that mutual funds do not earn returnsthat justify their information acquisition costs. This is consistentwith results for prior periods.     

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 value of coskewness in mutual fund performance evaluation

Recent asset pricing studies demonstrate the relevance of incorporating coskewness in asset pricing models, and illustrate how this component helps to explain the time variation of ex-ante market risk premiums. This paper analyzes the role of coskewness in mutual fund performance evaluation and finds evidence that adding a coskewness factor is economically and statistically significant. It documents that coskewness is sometimes managed and shows persistence of the coskewness policy over time. One of the most striking results is that many negative (positive) alpha funds, measured relative to the CAPM risk adjustments, would be reclassified as positive (negative) alpha funds using a model with coskewness. Therefore, performance ranking based on risk-adjusted returns without considering coskewness could generate an erroneous classification. Moreover, some fund characteristics, such as turnover ratio or category, are related to the likelihood of managing coskewness.     

Estimating the Equity Risk Premium Using Accounting Fundamentals

This study uses recent developments in the theoretical modelling of the links between unrecorded accounting goodwill, accounting profitability and the cost of equity, together with Capital Asset Pricing Model (CAPM) betas, to estimate the ex-ante equity risk premium in the UK. The results suggest that, over our sample period from 1968 to 1995, the premium has been in the region of 5%. Our estimate lends support to the view that the ex-ante equity risk premium is substantially less than the historical average of the excess of equity returns over the risk-free rate, and is similar to the rates applied recently by UK competition regulators.