Portfolio concentration and mutual fund performance

Mutual fund managers should choose to increase their portfolio concentration when their information set is valuable enough that the benefits of the expected increase in alpha more than offsets the costs of the expected increase in idiosyncratic volatility. Consistent with that idea, we find that fund performance improves after concentration increases. Because the expected costs of increased concentration vary between funds and over time, the required expected benefits before managers choose to increase concentration should also vary. Among other results, we show that the concentration-performance relation is stronger for funds with less institutional ownership and when investor sentiment is low.     

Active management, fund size, and bond mutual fund returns

Conventional wisdom holds that bonds are relatively homogenous investments compared to equities. Consequently, factors that explain variation in returns among bond mutual funds may differ in magnitude from those for equity mutual funds. In this study, a time-series cross-sectional analysis is employed to investigate the relationship between a bond fund's risk-adjusted return and specific fund attributes. Results indicate that a bond fund's past performance does not predict future performance and that bond fund managers are generally ineffective at increasing risk-adjusted returns. However, unlike equity mutual funds, bond mutual funds do appear to enjoy economies of scale.     

On the concentration of mutual fund portfolio holdings: Evidence from Taiwan

This paper tests the alternative hypotheses of investment selection skills versus overconfidence of equity mutual funds managers in Taiwan. We find that fund holdings’ concentration levels are high and positively related to funds’ risk-adjusted returns in tranquil market periods; however, the concentration levels are low and more negatively related to risk-adjusted returns in turmoil market periods. The time varying concentration-performance relation is not driven by fund size. Our finding implies that fund managers have superior investment selection skills when the market is less volatile, but they exhibit overconfidence when the market is in turmoil, suggesting an investment strategy of shifting from concentrated funds to more broadly diversified funds when market condition becomes worse.     

Informed trading around earnings and mutual fund alphas

We examine whether informed trading around earnings announcements drives mutual fund performance. The measure is motivated by prior studies arguing that a mutual fund is skilled if it buys stocks with subsequent high earnings announcement returns. We find that this measure predicts future mutual fund returns. On average, after adjusting for Carhart’s four risk factors, the top decile of mutual funds outperforms the bottom decile by 44 basis points per quarter. By decomposing fund alphas into two components in their relations to earnings, we find that this measure is only associated with earnings-related fund alphas. This measure can also be used to predict stock returns at future earnings announcements.     

Daily mutual fund flows and redemption policies

We examine how redemption policies affect daily fund flows in open-end mutual funds. Since short-term trading of fund shares, as manifested in daily fund flows, can have an adverse impact on returns to the fund’s shareholders, mutual funds might find it desirable to discourage short-term trading through the use of redemption fees. However, if daily fund flows are due to fund shareholders’ legitimate liquidity demands, the redemption fee would have little effect on daily fund flows and possibly adversely affect fund shareholders by imposing a liquidity cost on them. We find that the likelihood of a fund charging a redemption fee is largely a function of its overall fee structure. We also use a sample of funds that imposed redemption fees to examine whether the distribution of daily fund flows changes after the initiation of the redemption fee. We find that the redemption fee is an effective tool in controlling the volatility of fund flows.     

Improved inference for fund alphas using high-dimensional cross-sectional tests

The traditional fund-by-fund alpha inference suffers from various econometric problems (e.g., cross-sectional independence assumption, lack of power, time-invariant coefficient assumption, multiple-hypothesis-testing). Recognizing the panel nature of fund industries, we tailor four high-dimensional cross-sectional tests to shed light into both the zero-alpha hypothesis and ratio of non-zero alphas. Particularly, we augment Gagliardini et al. (2016) with a time-varying alpha estimator. Our results reject the zero-alpha joint hypothesis as the statistical significance of alphas is too high to be explained by luck. After controlling for luck, our empirical studies show that the power enhancement helps to identify a large portion of significant fund alphas, which cannot be achieved using the usual Wald test. Meanwhile, the time-varying approach shows that fund alphas diverge during the late 2000s Global Financial Crisis, which cannot be observed using the time-invariant model. Overall, relative to the literature, we draw a more accurate and complete picture, and provide several powerful tools for future research.     

Payoff complementarities and financial fragility: Evidence from mutual fund outflows

The paper provides empirical evidence that strategic complementarities among investors generate fragility in financial markets. Analyzing mutual fund data, we find that, consistent with a theoretical model, funds with illiquid assets (where complementarities are stronger) exhibit stronger sensitivity of outflows to bad past performance than funds with liquid assets. We also find that this pattern disappears in funds where the shareholder base is composed mostly of large investors. We present further evidence that these results are not attributable to alternative explanations based on the informativeness of past performance or on clientele effects. We analyze the implications for funds’ performance and policies.     

Coskewness timing ability in the mutual fund industry

The ability of mutual fund managers to time coskewness successfully can help them manage their portfolio’s exposure to potential losses and improve their fund’s performance. This study assesses whether mutual fund managers are able to manage the market exposure of their investment portfolios given a change in coskewness. We demonstrate that fund managers investing in Small Blend and Small Growth stocks possess the ability to time coskewness. On average, the fund managers of these two investment objectives increase the market exposures of their portfolios about 2.749 % and 1.340 %, respectively, based on their anticipations on future coskewness. Superiority is driven from the fact that the fund managers in small capitalization stocks are successfully able to manage the tail risk of their funds’ portfolios. The fund-by-fund results confirm that the number of individual funds succeeding in timing market skewness of the Small Blend and Small Growth investment objectives is larger than the remaining types. The main findings are robust when controlling for other types of timing ability, the periods of financial turbulence, and the construction of coskewness.     

Mutual fund characteristics, managerial attributes, and fund performance

This study provides a comprehensive examination of recent mutual fund performance by analyzing a large set of both mutual funds and fund attributes in an effort to link performance to fund-specific characteristics. The results indicate that the hypothesized relationships between performance and the explanatory variables are generally upheld. After taking into consideration general market conditions and fund investment objective, the characteristic variables that relate to fund popularity, growth, cost, and management also explain performance. Finally, after controlling for survivorship and benchmark error as well as fund-specific factors, the results refute the performance persistence phenomenon.     

Framing and the disposition effect: evidence from mutual fund investor redemption behaviour

Research on decision-making under uncertainty has highlighted that individuals often use simple heuristics and/or exhibit behavioural biases. Specifically, with respect to portfolio decisions, research has indicated that investors are subject to the disposition effect, i.e. they are reluctant to sell assets that have performed poorly (losers) and prone to sell assets that have performed well (winners). We find that the mutual fund investors in our sample are subject to the disposition effect when they withdraw the redemption proceeds from their account, but not when they reallocate the proceeds within the account. The evidence is consistent with Shefrin and Statman’s hypothesis that framing a transaction as a transfer as opposed to a sale mitigates the disposition effect.     

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.     

On the short-term persistence of mutual fund performance in Europe

In this article, we examine the short-term persistence in mutual fund performance in the main European markets between January 1990 and December 2022. The mutual fund industry in Europe has experienced significant growth in recent years as a consequence of the integration of its markets. However, the European mutual fund industry is still an unexplored area of research with only a small number of significant studies compared to the US industry. Using a sample of daily survivorship bias-free data on the five most important European mutual fund countries, which includes 2734 mutual funds across all countries, we find statistically significant persistence in the post-ranking quarter across different performance models for all countries. This evidence is present across all deciles including the top-decile and bottom-decile mutual funds. Further, we also extend our analysis to high inflation periods.     

Sentimental mutual fund flows

We show that many stylized empirical patterns for mutual fund flows are driven by investor sentiment. Specifically, when sentiment is high, investors exhibit a stronger tendency of chasing past fund performance; fund flows are less sensitive to fund expenses; and investors are attracted more to funds with sheer visibility. Moreover, the well‐documented positive relation between fund flows and future fund performance is significant only during high sentiment periods and is mainly driven by expected component of fund flows. Finally, we show that mutual fund investors exhibit a significantly negative timing ability at the individual fund level when sentiment is high.     

Commercial bank mutual fund activities: Implications for bank risk and profitability

This paper examines the risk structure of bank holding companies and the effect of mutual fund activities on bank risk and profitability over the period 1987–1994. Findings from structural change tests indicate a significant decline in bank risk occurred near the mid-point of the study. Results from a confirmatory factor analytic model employed to examine the impact of mutual fund activities on banks suggest that mutual fund activities moderated bank industry systematic risk during the sample period. Mutual fund activities also increased the profitability of banks. These results suggest that mutual funds represent a productive avenue of expansion for bank holding companies.     

Mutual fund selection for realistically short samples

Performance of mutual fund selection methods is typically assessed using long samples (long time series). We investigate how well the methods perform in shorter samples. We carry out an extensive simulation study based on empirically motivated skill distributions. For both short and long samples, we present evidence of large differences in performance between popular fund selection methods. In an empirical analysis, we show that the differences documented by the simulations are empirically relevant.     

Rating mutual funds: Construction and information content of an investor-cost based rating of Danish mutual funds

We develop a new rating of mutual funds: the atpRating. The atpRating assigns crowns to each individual mutual fund based upon the costs an investor pays when investing in the fund in relation to what it would cost to invest in the fund's peers. Within each investment category, the rating assigns five crowns to funds with the lowest costs and one crown to funds with the highest costs.We investigate the ability of the atpRating to predict the future performance of a fund. We find that an investor who has invested in the funds with the lowest costs within an investment category would have obtained a risk-adjusted excess return that is approximately 3–4 percentage points higher per annum than if the funds with the highest costs had been invested in.We compare the atpRating with the Morningstar Rating. We show that one reason why the atpRating and the Morningstar Rating contain different information is that the returns Morningstar uses as inputs when rating funds are highly volatile whereas the costs the atpRating uses as inputs when rating funds are highly persistent. In other words, a fund that has low costs one year will most likely also have low costs the following year, whereas the return of a fund in a certain year generally contains only little information about the future return that the fund will generate.Finally, we have information on the investments in different mutual funds made by a small subgroup of investors known to have been exposed to both the atpRating and the Morningstar Rating. We find that investors have clear preferences for funds rated high by both the atpRating and the Morningstar Rating.     

Revisiting mutual fund performance evaluation

Mutual fund manager excess performance should be measured relative to their self-reported benchmark rather than the return of a passive portfolio with the same risk characteristics. Ignoring the self-reported benchmark results in different measurement of stock selection and timing components of excess performance. We revisit baseline empirical evidence fund performance evaluation utilizing stock selection and timing measures that incorporate the self-reported benchmark. We introduce a new factor exposure based approach for measuring the – static and dynamic – timing capabilities of mutual fund managers. We overall conclude that current studies are likely to be misstating skill because they ignore the managers’ self-reported benchmark in the performance evaluation process.     

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.     

Timing and selectivity in Portuguese mutual fund performance

We extend the international evidence on timing and selectivity skills of fund managers by applying the Henriksson and Merton [Henriksson, R., Merton, R., 1981. On market timing and investment performance. II. Statistical procedures for evaluating forecasting skills. J. Bus. 54, 513–533] model to Portuguese based mutual funds investing in local, European and International equity.

The results show that managers do not exhibit selectivity and timing abilities, and there is even some evidence of negative timing. Furthermore, we observe a distance effect on stock selection performance, since fund managers that invest locally seem to perform better that those who invest in foreign markets. However, this effect is reverted with respect to market timing skills of fund managers, suggesting that International fund managers are more focused in market timing strategies.