Mutual Fund Performance: Measurement and Evidence1

The paper provides a critical review of empirical findings on the performance of mutual funds, mainly for the US and UK. Ex‐post, there are around 0‐5% of top performing UK and US equity mutual funds with truly positive‐alpha performance (after fees) and around 20% of funds that have truly poor alpha performance, with about 75% of active funds which are effectively zero‐alpha funds. Key drivers of relative performance are, load fees, expenses and turnover. There is little evidence of successful market timing. Evidence suggests past winner funds persist, when rebalancing is frequent (i.e., less than one year) and when using sophisticated sorting rules (e.g., Bayesian approaches) ‐ but transactions costs (load and advisory fees) imply that economic gains to investors from winner funds may be marginal. The US evidence clearly supports the view that past loser funds remain losers. Broadly speaking results for bond mutual funds are similar to those for equity funds. Sensible advice for most investors would be to hold low cost index funds and avoid holding past ‘active’ loser funds. Only sophisticated investors should pursue an active ex‐ante investment strategy of trying to pick winners ‐ and then with much caution.     

How far have the frontiers of the state been rolled back between 1979 and 1987?

The Conservative Government came to power in 1979, with the general aim of reducing the role of the public sector. One measure of their success or failure is the extent to which the public estate ‐ the financial and physical assets which go to make it up ‐ have been reduced or transferred to the private sector. Against that standard their record falls far short of what the rhetoric appeared to promise, and their opponents feared ‐ a wholesale dismantling of the State.     

Council Leaders in the 'New Britain': Looking Back and Looking Forward

This is an interesting time to review the attitudes and expectations of some leading figures in local government as the old age of despair is drawing to an end and a new dawn seems to be brightening the horizon. This article reports the view of half a dozen local government leaders. Early indications are that the Labour Government is serious about restoring at least some of local government's lost powers and functions. These interviews suggest that Ministers will find a ready and eager response when they do so, for example the enthusiasm with which the best value scheme has been greeted. In other areas, including tax capping and the introduction of regional government, the future is less certain but the more radical proposals being canvassed are likely to command support from senior councillors if Ministers have the nerve to proceed with them.     

NHS purchasing and the supply council

The Defence budget is over‐stretched. The scope for greater efficiency is large, but only radical and unpalatable action ‐ possibly at the expense of the UK defence‐industry ‐ can produce enough savings in existing programmes.     

Economic policy and prospects

Though now into their second term of office, the Government are still trying to fulfil the objectives of the first ‐ to cut public spending and reduce taxes. The hard choices they eventually make will in part be dictated by the following sorts of considerations:

• technical ‐ year‐to‐year forecasts

• economic ‐ growth in gdp

• political ‐ reduction in income support.

At the centre of these and other often conflicting sets of considerations is the Chancellor of the Exchequer. Chancellors make many statements, but few are as clear as that made by Nigel Lawson, in the course of an interview with Max Wilkinson, economics editor of the Financial Times, from which we have extracted the following.     

An Agenda for Re-inventing Local Government

A new government will find a major agenda of issues if trust between local and central government is to be re-built and the place of local government re-established. There will be challenges for both sides, but Ministers will need to take initiative in signing the European Charter for Self-Government, developing a concordat, being clear about roles and doing something about finance. Local political management and democracy and the policy process also need attention.     

Is financial advice a cure-all or the icing on the cake for financial literacy? Evidence from financial market participation in China

We examine how financial advice interacts with financial literacy to shape household decisions on stock market participation in China. Particularly, we investigate how the effect of financial advice varies with economic expectations, preferences for asset diversification and the level of financial literacy. Feeding the data of 5274 households into a Probit model that predicts the probability of holding stocks, we find that, while an increase in financial literacy significantly raises the stock market participation of all households, seeking financial advice only increases the participation for those households which have a preference for asset diversification or which have an optimistic expectation about the economy. Moreover, the effect of financial advice is concentrated on households with high financial literacy, implying that an insufficient level of financial literacy is the reason for the poor performance of financial advice in China. We also examine if there are influential trust or quality concerns which would reduce the effectiveness of financial advice but we find no significant evidence for it.     

Conviction politics and the public service

If the Government can successfully privatise British Telecom, then the way is open to taking the other large State monopolies, such as British Gas, out of public ownership. But a careful analysis of the way regulated competition is likely to work suggests that the intended benefits ‐ in terms of greater efficiency ‐ are not likely to materialise.     

Political connections and depositor discipline

We examine the effects of political connections on depositor discipline in a sample of Turkish banks. Banks with former members of parliament at the helm enjoy reduced depositor discipline, especially if the former politician's party is currently in power – less so if the former politician served as a minister. Banks with structural problems are more likely to appoint former politicians, but our results remain robust after controlling for selection effects. Ministers may reduce depositor discipline less because they signal severe problems and because the additional government deposits they bring to the bank during their term tend to leave with them.     

Regulatory Reform Orders: A New Weapon in the Armoury of Law Reform

The Regulatory Reform Act 2001 gave legislative expression to the New Labour Government's re-interpretation of the Conservatives' deregulation initiative. In its emphasis on better regulation, the Labour Government significantly expanded the general authorization to amend primary legislation by order that was given to Ministers under legislation enacted in 1994. This article summarizes the background to the new Act. It analyses the opportunities now available to Whitehall to remove, reduce or reallocate red-tape burdens and evaluates the enhanced scrutiny role that falls to Westminster to ensure Ministers' compliance with the statutory constraints.     

How does the stock market react to the announcement of green policies?

We investigate the impact of 19 announcements of environmental regulation on the equities listed on the Australian Stock Exchange over the period 2005–2011. Using a well-established event study methodology, we assess whether these announcements are value constructive or destructive for equity investors. Additionally, we estimate the change in systematic risk following the announcements. Our results show that the Australian market was particularly sensitive to the carbon pollution reduction scheme (CPRS) announcement. A cumulative abnormal return of −31% was recorded in the alternative energy sector after Australia submitted its target range to the Copenhagen Accord. We observe that a move towards a greener nation has a mixed effect on abnormal returns with apparent sector-by-sector differences. Green policies appear to affect the long-term systematic risk of industries, leading to the diamond risk phenomenon.     

Distributional Implications of Tax Relief on Voluntary Private Pensions in Spain*

Using taxation statistics, this paper explores the distributional implications of tax relief on private pensions in Spain in 2002. For this purpose, the author suggests a decomposition of the Kakwani index and its generalisations that allows us to distinguish between the regressivity caused by targeting and that due to benefits allocation among recipients. This paper finds that these tax incentives are regressive ‐ mainly for the latter reason ‐ and have negative although small distributional effects. Finally, this work presents several proposals for reform of the current system and simulates their implications for equity.     

Megaw and the public sector: A union response

One Civil Service union ‐ the Institute of Professional Civil Servants ‐ welcomed the Megaw Report on the grounds that it would help restore internal relativities. Unions representing the great majority of civil servants, however, came out strongly against it. The general secretaries of the Civil and Public Servants Association and the Society of Civil and Public Servants prepared a note for the TUC's public service committee on the implications of Megaw for the public sector as a whole. The following is based on that note.     

The optimal portfolio of start-up firms in venture capital finance

Venture capitalists (VCs) not only finance but also add value to start-up companies. Advising firms is time consuming and creates a trade-off between intensity of advice and portfolio size. We jointly determine the optimal number of portfolio companies and the intensity of managerial advice. Diminishing returns to advice per firm call for a larger portfolio. With progressively increasing managerial effort cost, however, a larger number crowds out advice to each individual firm. As they receive less support, entrepreneurs request a larger profit share, making further portfolio expansion eventually unprofitable. Comparative static analysis shows how optimal portfolio size responds to venture returns and other parameters.     

Simulation of the Impact of the Recognition of Stock Options on the Earnings: The case of Canadian Companies*

One of the most controversial accounting issues pertains to stock compensation. In Canada, the Canadian Institute of Chartered Accountants (CICA) approved section 3870, Stock‐based Compensation and Other Stock‐Based Payments, on November 13, 2001, to take effect in January 2002. Section 3870 forces companies to “take a look at the real economic cost of most of the stock‐based compensation mechanisms” (AcSB Bulletin, October 2001, 1). The adoption of section 3870 was aimed at harmonizing Canadian accounting practice with U.S. standards. The new standard, which was initially based on two American accounting standards ‐ APB Opinion No. 25 and SFAS No. 123 ‐ gave companies the choice of using either the fair value method or the pro forma disclosure of net income and adjusted earnings per share to account for stock‐based compensation. The Accounting Standards Board (AcSB) nevertheless recommended that Canadian companies use the fair value method, which consists in estimating and recognizing the value of the stock options at the grant date.     

Social learning with differentiated products

Learning from friends is a key process by which consumers acquire information about available products. This article embeds social learning in a model of firms producing differentiated products. I consider how the structure of social relationships between consumers influences pricing and welfare. In particular, how a variety of characteristics of social networks ‐ distribution of friendships, homophily, clustering, and correlations between an individual's preferences and number of friends ‐ influence these outcomes. I also find conditions under which consumer awareness and the sensitivity of demand to prices are useful measures of the informational efficiency of markets.     

Judicial review of public administration

Government Ministers and local authorities have been increasingly, and embarrassingly, hauled before the courts. The threat that Thames Water Authority might suffer the same fate at the hands of the National & Local Government Officers Association was a major factor in the Government's decision to postpone privatisation of the water industry. All this is the result of a new judicial process that has crept up on a largely unsuspecting public sector‐and is being gleefully exploited by trade unions and others.     

Reinsurance Brokers and Advice Quality: Is There a Need for Regulation?

Brokers play an increasing role in the distribution of reinsurance. In order to analyse reinsurance brokers' advice quality, we employ a model in which a monopoly broker advises cedents to buy a particular one out of similar reinsurance policies that cost the same but differ in details. The broker decides on how much to invest in his advice quality and on the price to charge for his service. We find that the broker's advice quality is generally lower and the price for his service higher than in the social optimum, even in the presence of a potential new entrant.     

The Effects of EU Formula Apportionment on Corporate Tax Revenues*

The European Commission proposes to replace the current system of taxing corporate income using separate accounting by a two‐step ‘consolidation and apportionment’ procedure. This paper uses a large set of unconsolidated firm‐level data to assess the likely impact on corporate tax revenues in each member state. Taking pre‐tax profit as given, overall tax revenues would be likely to drop by 2.5 per cent if companies could choose whether to participate. By contrast, if they were forced to participate, total tax revenues would be likely to increase by more than 2 per cent, leaving some European countries ‐ most notably, Spain, Sweden and the UK ‐ better off. We investigate how sensitive these results are to the apportionment factors used.     

Efficiency in the civil service

Clarity in government publications is at the end of the rainbow. Obfuscation does not always come from jargon disguising complexity; on occasion, banality can be seen to be barely masking a vacuum.

We leave it to readers to judge which of those two caps fits the white paper on Efficiency in the Civil Service (Cmnd 8293). We give the text in the first column, together with a translation in the second. Our model for this, as it must be for any aspiring translator, is W.J.M. Mackenzie's incomparable rendering of an earlier white paper, Control of Public Expenditure (Cmnd 1432), which he first published in The Guardian of 25 May 1963.

We do, however, have one advantage over Mackenzie. Thanks to our resident Whitehall mole, we have been lucky enough to get a sight of what may well have formed the ‘Yes, Minister’ briefing for Lord Soames when he was considering presenting his white paper to the 1922 Committee. Extracts from this are printed in italics underneath our own translation. They provide a necessary gloss not only on what is contained in the white paper but also ‐ and perhaps more importantly ‐ on what has been left out.