Emerging Market Bond Funds: A Comprehensive Analysis

We analyze U.S.‐based emerging market bond funds over a ten‐year (1996–2005) complete cycle of ups and downs in the dominant emerging bond markets. Emerging market bond funds outperform comparable domestic and global bond funds. The results are robust across both conditional and unconditional models. The funds also provide international diversification benefits to U.S. and international bond and equity portfolios. The funds exhibit persistence in performance and seasonality. Active funds, large funds and funds with high minimum purchases perform better on a total return basis but not on a risk‐adjusted basis.     

The Performance of Actively Managed International Mutual Funds

International mutual funds allow individual investors to diversify abroad at a reasonable cost. This paper tests whether international funds that actively engage in country and security selection outperform passive global benchmarks. We apply a mean-variance efficiency test that incorporates the practical prohibition against short sales of open-end mutual funds. Our tests reject the efficiency of the world equity market portfolio over the sample period, and our funds as a group outperform the inefficient world index. However, we find no evidence of security selectivity ability using a 12-country benchmark. We do find that active international funds provide global diversification benefits. Tests using the Positive Period Weight (PPW) measure of Grinblatt and Titman (1989), which is robust to nonlinearity in fund and benchmark returns, yield similar results.     

Globalization and portfolio risk over time: The role of exchange rate

We examine benefits of international diversification for the period 1 January 1988 to 30 June 2000. We introduce a new variable (lambda) that measures these benefits more directly than do the pairwise correlations among equity markets, which are used in most other studies. Our study shows that despite international integrations, the benefits of international diversification measured in USD persist. Using lambda, we provide evidence that the increase in co-movements between equity market returns (measured in local currencies) has been counterbalanced by movements in exchange rates. We confirm our results by subjecting the trend in lambda to several tests.     

Performance and diversification benefits of IPO-focused mutual funds

We investigate whether mutual funds that invest in initial public offerings (IPOs) outperform the Renaissance IPO Index, IPOX® 100 U.S. Index, and other comparable equity funds that do not invest in IPOs. We also explore whether investors gain diversification benefits by investing in IPO-focused mutual funds. Using a sample of active open-ended US equity mutual funds, we find that IPO-focused funds outperform the Renaissance IPO Index and comparable funds that do not invest in IPOs. Moreover, they provide investors with the benefit of diversification along with better returns. We also find the value added by active management based on IPO strategy.     

Portfolio selection, diversification and fund-of-funds: a note

The present paper examines the performance and diversification properties of active Australian equity fund‐of‐funds (FoF). Simulation analysis is employed to examine portfolio performance as a function of the number of funds in the portfolio. The present paper finds that as the number of funds in an FoF portfolio increases, performance improves in a mean–variance setting; however, measures of skewness and kurtosis behave less favourably given an investor's preferences for the higher moments of the return distribution. The majority of diversification benefits are realized when a portfolio of approximately 6 active equity funds are included in the FoF portfolio.     

The Best of Both Worlds: Accessing Emerging Economies via Developed Markets

A growing body of evidence suggests that the benefits of international diversification via developed markets have declined dramatically. While emerging markets still offer diversification opportunities, their public equity indices capture only a fraction of emerging countries' economic activity. We propose a diversification approach that exploits the global connectedness of developed countries to gain exposure to emerging countries' overall economies rather than their shallow equity markets. In doing so, we demonstrate that developed markets still offer substantial diversification benefits beyond those available through equity indices. Our results suggest that relying on equity indices to assess diversification benefits understates diversification gains.     

International Real Estate Mutual Fund Performance: Diversification or Costly Information?

We investigate the net effect between diversification benefit and information cost of international real estate mutual funds from three dimensions: whether investors can benefit from investing in international real estate mutual funds, whether managers of international real estate mutual funds possess superior market knowledge and timing abilities, and whether investors are motivated by returns or diversification. Our findings are threefold. First, the results show that international real estate mutual funds perform better and are less risky than domestic real estate mutual funds before Jun 2007. That is, diversification benefits outweigh the information costs, and investors therefore gain from investing in international real estate mutual funds. However, the benefit is reduced because of the economic shock of sub-prime financial crisis. Second, on average, neither international mutual fund managers nor domestic mutual fund managers possess market timing abilities. Finally, we find that fund flows are driven by investors’ return-chasing behaviors and fund size, but not by diversification purpose.     

Effect of fund size on the performance of Australian superannuation funds

This study examines the relationship between fund size and performance for two major superannuation industry sectors in Australia: retail and not‐for‐profit, using a unique but confidential database. Results suggest that members benefit from being invested in larger superannuation funds for three reasons: (i) larger not‐for‐profit funds provide diversification benefits of investing in more asset classes including unlisted property and private equity, (ii) larger funds in both sectors avoid the scale diseconomies in investment returns documented in studies of equity mutual funds and (iii) larger funds make substantial savings by spreading fixed operating costs (such as IT infrastructure) over a larger asset base.     

An empirical examination of the benefits of international diversification

We examine the benefits of international portfolio diversification for U.K. investors between January 1985 and December 2000 using the approach of Wang [Wang, Z., 1998. Efficiency loss and constraints on portfolio holdings. Journal of Financial Economics 48, 359–375] and Li et al. [Li, K., Sarkar, A., Wang, Z., 2003. Diversification benefits of emerging markets subject to portfolio constraints. Journal of Empirical Finance 10, 57–80]. We find significant increases in the Sharpe [Sharpe, W.F., 1966. Mutual fund performance. Journal of Business 39, 119–138] and certainty equivalent return (CER) performance in moving from a domestic strategy to an international strategy that includes either global industry or country equity portfolios, even in the presence of short selling restrictions. We also find significant diversification benefits using U.K. unit trusts with international equity objectives. However, U.K. international unit trusts do not capture all the diversification benefits provided by either global industry or country equity portfolios.     

Forms of Foreign Investment Liberalization and Risk in Emerging Stock Markets

I examine the effect of different forms of foreign investment liberalization on risk in emerging equity markets, including international cross-listings and closed-end country funds, and in the domestic equity market as foreign investment restrictions are eliminated. I find that in Latin American markets volatility declines significantly with different forms of foreign investment liberalization, and in Asian markets volatility does not increase significantly. Volatility is driven by domestic factors in South America, but the transmission of volatility from the United States to Mexico increases after liberalization. The market risk exposure increases in Argentina after liberalization, in Chile with an index of American Depositary Receipts, and in Thailand with greater foreign ownership, reducing the diversification benefits of these markets.     

The international diversification fallacy of exchange-listed securities

This paper reviews various investment vehicles and examines their international diversification potential. The primary focus is on the ability of U.S. exchange-listed investments such as closed-end country funds, American depository receipts (ADRs), and multinational corporations (MNCs) to provide a diversification effect similar to direct investment in foreign equity. The results show that the U.S. exchange-listed securities included in this study behave more like the host exchange than their home exchange. This result suggests that these U.S. exchange-listed securities, on average, do not perform an international diversification role for U.S. investors.     

Diversification benefits and persistence of US-based global bond funds

This paper examines diversification benefits and performance persistence of 188 US-based global bond funds that survived and were defunct during the period of 1993–2004. Consistent with managed fund literature, global funds underperform broad-based benchmark indexes; however, the underperformance is less than the funds’ expense ratio. The results using both simple and time-varying frameworks suggest that global funds provide higher total return and comparable risk-adjusted return to domestic bond funds. For US investors specializing in domestic bond funds, global funds can enhance return by 0.5–1% per year without increasing risk. Global funds also provide incremental diversification benefits to equity fund investors. The funds exhibit short-run performance persistence, but this is difficult for investors to exploit, especially in long-run. Global funds show no return seasonality during the sample period. On a risk-adjusted basis, larger and newer funds and funds with long maturity and low expense ratio perform well.     

Equity fund ownership and the cross-regional diversification of household risk

We explore the link between portfolio home bias and consumption risk sharing among Italian regions using household-level information on consumption, income and portfolio holdings. Since equity funds are typically diversified at the national or international level, we use data on equity fund ownership to proxy for regional home bias. Cross-regional patterns of equity fund ownership are qualitatively consistent with simple portfolio theory: regions with more asymmetric business cycles are more diversified because they have higher fund participation rates (the extensive margin of diversification) and higher average holdings of equity funds (diversification’s intensive margin). Also, fund holdings increase with the exposure of non-tradable income components (such as labor or entrepreneurial income) to regional shocks. Finally, interregional consumption risk sharing increases with fund holdings and this effect seems strongest when participation is widespread. Increased equity market participation could substantially improve interregional risk sharing.     

Diversification,Integration and Emerging Market Closed-End Funds

We study a new class of unconditional and conditional mean-variance spanning tests that exploits the duality between Hansen-Jagannathan bounds (1991) and mean-standard deviation frontiers. The tests are shown to be equivalent to standard spanning tests in population, but we document substantial differences in the small sample performance of alternative tests. Our empirical application examines the diversification benefits from emerging equity markets using an extensive new data set on U.S. and U.K.-traded closed-end funds. We find significant diversification benefits for the U.K. country funds, but not for the U.S. funds. The difference appears to relate to differences in portfolio holdings rather than to the behavior of premiums in the United States versus the United Kingdom.     

Performance analysis of a collateralized fund obligation (CFO) equity tranche

This article examines the performance of the junior tranche of a collateralized fund obligation (CFO), i.e. the residual claim (equity) on a securitized portfolio of hedge funds. We use a polynomial goal programming model to create optimal portfolios of hedge funds, conditional to investor preferences and diversification constraints (maximum allocation per strategy). For each portfolio, we build CFO structures that have different levels of leverage, and analyze both the stand-alone performance as well as potential diversification benefits (low systematic risk exposures) of investing in the equity tranche of these structures. We find that the unconstrained mean-variance portfolio yields a high performance, but greater exposure to systematic risk. We observe the exact opposite picture in the case of unconstrained optimization, where a skewness bias is added, thus proving the existence of a trade-off between stand-alone performance and low exposure to systematic risk factors. We provide evidence that leveraged exposure to these hedge fund portfolios through the structuring of CFOs creates value for the equity tranche investor, even during the recent financial crisis.     

Who benefits more from international diversification?

This paper investigates the relative magnitude of the international diversification benefits for the domestic investors in various countries. The constraints of short-sales, over-weighting investments, and investing region are considered. The empirical results suggest that local investors in the less developed countries, particularly in East Asia and Latin America, comparatively benefit more from both regional and global diversification. This finding holds even though the international market has become more integrated so that the diversification benefits have decreased over the past two decades. The results are useful for asset management professionals to determine target markets to promote the business of national/international funds.     

International equity flows, marginal conditional stochastic dominance and diversification

The weak empirical evidence linking diversification and international equity flows calls into question the diversification paradigm at the international level and the analytical framework it implies. Using the concept of Marginal Conditional Stochastic Dominance (MCSD) to estimate the diversification opportunities, this paper reexamines the role that diversification opportunities play in the determination of international equity flows. It provides strong evidence that when diversification opportunities are measured in terms of MCSD, they are significant determinants of international equity flows. Capital flows into dominant markets and flees markets that are dominated. These results are robust with respect to a range of conventional control variables documented in the outstanding literature.     

International index funds and the investment portfolio

Financial advisors often recommend that investors diversify their investments internationally and also use mutual funds with the lowest expenses. Recently it has been possible to use both of these strategies by purchasing an international index fund. This study considers international index funds as a means of portfolio diversification. Performance is evaluated using monthly return data on nine international indexes from January 1989 through December 1997. Returns are measured against the S & P 500 index returns. The results of statistical tests suggest that international index investing does not offer superior returns compared to the S & P 500 index but diversification benefits do exist.     

Diversification benefits of commodity futures

The finance literature seems to be in support of the diversification benefits of adding commodity futures to an existing portfolio. Yet no empirical work has been performed to test whether the benefits are indeed statistically significant. This paper addresses several unresolved issues concerning the potential diversification benefits of commodities. First, we attempt to ascertain whether the alleged diversification benefits exist and are statistically significant. Second, to what extent are the diversification benefits unique to US investors? Would investors of a resource-based economy like Canada also benefit from adding commodities to their portfolios? Third, recent studies indicate that correlations among international equity returns are higher during bear markets than during bull markets. This type of regime-switching correlation behavior will mean lower diversification benefits from international investments when investors face a bearish environment at home. Do commodity futures display the same type of regime-switching behavior? To what extent do commodity futures offer real diversification benefits that are robust over time and across regimes? Finally, commodities may appear to be an asset for the more adventurous investors with higher risk tolerance. We want to know what type of investors should hold commodities. We demonstrate that the diversification benefit of commodities is a far more complex phenomenon than often understood in the finance literature.     

Price Performance Following Share‐Repurchase Announcements by Closed‐End Funds

We investigate the price performance of closed‐end funds that announce share‐repurchase programs. Closed‐end funds experience positive average stock‐price reactions to the announcements. The long‐run buy‐and‐hold abnormal returns of repurchasing funds over the subsequent three years are significantly higher than a nonrepurchasing control sample matched by size, type, investment style and geographic diversification. Funds with larger discounts, international funds, equity funds, and funds that announce larger repurchases or frequently announce repurchases, experience more positive stock‐price reactions. Except for larger repurchases, the same characteristics are associated with more positive long‐run buy‐and‐hold returns.