Investing in mutual funds when returns are predictable

This paper forms investment strategies in US domestic equity mutual funds, incorporating predictability in (i) manager skills, (ii) fund risk loadings, and (iii) benchmark returns. We find predictability in manager skills to be the dominant source of investment profitability—long-only strategies that incorporate such predictability outperform their Fama-French and momentum benchmarks by 2 to 4%/year by timing industries over the business cycle, and by an additional 3 to 6%/year by choosing funds that outperform their industry benchmarks. Our findings indicate that active management adds significant value, and that industries are important in locating outperforming mutual funds.     

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.     

Country and industry concentration and the performance of international mutual funds

We examine the relation between country and industry portfolio concentration and performance using a data set of international equity mutual funds. When sorted by concentration measures, funds in the most concentrated quintile outperform those in the most diversified quintile by 0.16% and 0.30% monthly in country and industry dimensions, respectively. Further analysis shows that the superior performance of concentrated funds is largely driven by industry rather than country concentration, suggesting the existence of global industry private information. Finally, we show that industry-concentrated funds rotate top-holding industries less frequently than their diversified counterparts, and that the industries these funds purchase subsequently outperform the industries they sell.     

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.     

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.     

Performance and risk exposure of international mutual funds

This study examined whether internationally diversified mutual funds increase a U.S. investor 's risk-adjusted return above that on a domestic benchmark mutualfund. Average returns on about one-half of the international funds exceeded the domestic benchmark fund's return. The risk-adjusted returns on the international mutual funds were not significantly different from that on the domestic benchmark fund. These results differ from earlier studies which generally found superior returns on international mutual funds. The benefits for the U.S. investor of holding an internationally diversified mutual fund appear to be limited for the period studied.     

Homemade international diversification under economic policy uncertainty

We examine how US mutual funds that invest domestically make portfolio adjustments by incorporating US-listed foreign stocks (cross-listed stocks) when faced with US market economic policy uncertainty. We document a positive association between US economic policy uncertainty and US mutual funds’ weight of cross-listed stocks, and find that the effect is concentrated in funds that mainly invest in the US domestic market. The findings are not sensitive to the instrumental variable approach, model specification, sampling, variable definition, and controlling for macro characteristics. Funds with higher weight of cross-listed foreign stocks when US economic policy uncertainty increases outperform other funds, indicating the rationality of such an investment strategy. A long-short portfolio generates 3.4% annualized abnormal return in the immediate following quarter. Our study shields light not only on the international diversification benefit of US-listed foreign stocks but also on the importance of capital market openness for domestic investors.     

Performance aspects of Greek bond mutual funds

This paper examines the performance characteristics of Greek bond funds and the impact of fund flows on portfolio returns. The evidence shows that on average bond funds do not offer risk-adjusted profits exceeding the returns of the benchmark index, which is in consistence with the US and international evidence. Returns before fees are slightly superior to the returns of the benchmark index, but when fees are considered they lag considerably. The security selection and market timing skills of fund managers are also tested using both an unconditional and a conditional model to test for the impact of public information variables. We also find that fund flows impact negatively on market timing.     

Behavioural analysis of socially responsible investment managers: specialists versus non-specialists

We analyse the performance and performance persistence of US socially responsible investment (SRI) managers from a managers’ perspective, differentiating between specialist managers (only running SRI mutual funds) and non-specialists (running SRI and conventional mutual funds). We find that the SRI fund nature has a significantly negative influence on the non-specialist performance. Furthermore, top managers of both groups persistently outperform SRI funds. However, non-specialist managers obtain superior performance to specialist managers, perhaps because of learning synergies in both fund niches. Results also show more persistence with non-specialists, especially with regard to conventional mutual funds.     

A note on fair value pricing of mutual funds

Mutual funds claim that they employ fair value pricing to prevent active investors from trading on their beliefs that the funds’ net asset values are stale. Our results support the funds’ assertions. We estimate the returns from the following active strategy: buy international open end mutual funds that do not employ fair value pricing on days that the S&P500 index rises by a large amount, and/or sell them on days that the S&P500 index declines by a large amount. These active strategies significantly outperform pure buy-and-hold strategies. We conclude that international mutual funds should make greater use of fair value pricing.     

International evidence on ethical mutual fund performance and investment style

Using an international database containing 103 German, UK and US ethical mutual funds we review and extend previous research on ethical mutual fund performance. By applying a Carhart multi-factor model [Carhart, Journal of Finance 57 (1997) 57] we overcome the benchmark problem most prior ethical studies suffered from. After controlling for investment style, we find no evidence of significant differences in risk-adjusted returns between ethical and conventional funds for the 1990–2001 period. Our results also suggest that ethical mutual funds underwent a catching up phase, before delivering financial returns similar to those of conventional mutual funds. Finally, our performance estimates are robust to the inclusion of ethical indexes, which, surprisingly, are not incrementally capable of explaining ethical mutual fund return variation.     

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.     

Persistent performance in the mutual fund market: Tests with funds and investment advisers

Recent studies of mutual funds have concluded that there is some evidence of superior performance. We test for the existence of superior performance and its persistence with mutual funds and mutual fund investment advisers on a data set of monthly returns from 1979 to 1989 for 1,387 mutual funds grouped by 243 advisers. We find no evidence of superior performance or its persistence but we do find significant evidence of persistence of inferior performance. Consistent with previous studies our findings depend on the benchmark chosen, with multiple benchmarks producing a larger degree of inferior performance.     

Benchmarking the performance of recommended allocations to equities,bonds, and cash by international investment houses

We conduct performance tests of the recommended asset allocations made by a panel of international investment houses (the “Houses”) from 1982 through 2005. We compare the returns and Sharpe Ratios from the recommended-weight portfolio against those of several benchmark portfolios and to a set of 10,000 returns and Sharpe Ratios from randomly shuffled-weight and shuffled-weight change portfolios. We find that the Houses generally fail to outperform the benchmarks. The shuffled-weight change benchmark exhibits a robust “style-preserving” property in that the average portfolio standard deviation is nearly equal to the portfolio standard deviation from the actual recommended weights.     

Mutual Fund Herding and the Impact on Stock Prices

We analyze the trading activity of the mutual fund industry from 1975 through 1994 to determine whether funds "herd" when they trade stocks and to investigate the impact of herding on stock prices. Although we find little herding by mutual funds in the average stock, we find much higher levels in trades of small stocks and in trading by growth-oriented funds. Stocks that herds buy outperform stocks that they sell by 4 percent during the following six months; this return difference is much more pronounced among small stocks. Our results are consistent with mutual fund herding speeding the price-adjustment process.     

UK equity mutual fund alphas make a comeback

In this study, we re-visit the performance of 887 active UK equity mutual funds using a new approach proposed by Angelidis, Giamouridis, and Tessaromatis. The authors argue that mutual funds stock selection is driven by the benchmark index, so if the benchmark generates alpha, there will be a bias in interpretation of manager's stock-picking ability. In their model, the alpha of a fund is adjusted by the benchmark's alpha. By applying this method, we eliminate bias inflicted by the persistently negative alphas of FTSE 100 Index in the period 1992–2013. We find that adjusted Fama–French and Carhat alphas of UK equity mutual funds are higher than those implied by the standard three- and four-factor models and are overall positive, contrary to most of the existing literature on UK fund performance. This result is consistent across funds' investment styles and robust to the use of FTSE Small Cap as benchmark for a sub-sample of small cap funds.     

Risk-taking and performance of government bond mutual funds

This paper investigates the risk exposures of government bond mutual funds and how risk-taking behavior affects fund performance. Government bond mutual funds often outperform their respective benchmark bond indexes before but not after adjusting for bond market risk factors. We show that the risk-taking behavior of fund managers helps to explain the different performances of government bond funds with and without controlling for the risk factors. Our results suggest that risk-taking leads to higher returns relative to benchmarks in normal risk periods but lower returns in high risk periods, suggesting that fund managers consistently take risky bets in fund management. We further show that the risk-taking of government bond funds is persistent and that investors typically have no ability to differentiate between the skill and risk components of fund performance. These findings suggest why fund managers have incentives to take consistently risky positions.     

The Performance of Hedge Funds: Risk, Return, and Incentives

Hedge funds display several interesting characteristics that may influence performance, including: flexible investment strategies, strong managerial incentives, substantial managerial investment, sophisticated investors, and limited government oversight. Using a large sample of hedge fund data from 1988–1995, we find that hedge funds consistently outperform mutual funds, but not standard market indices. Hedge funds, however, are more volatile than both mutual funds and market indices. Incentive fees explain some of the higher performance, but not the increased total risk. The impact of six data-conditioning biases is explored. We find evidence that positive and negative survival-related biases offset each other.     

Performance attribution of mutual funds in India: outperformance or mis‐representation?

We conduct a novel holdings‐based performance attribution, particularly suited to emerging markets, for equity‐oriented active mutual funds in India. Although, we find significantly positive alphas for an average fund, the stated benchmarks are grossly mis‐specified. A style‐adjusted benchmark could beat the stated benchmarks by greater margins than the funds themselves. While funds’ trading activity consistently adds value, cash drag and market timing usually diminish value. Although, the best‐performing funds exhibit superior security selection abilities, their outperformance does not persist. However, despite the lack of persistence winner funds continue to generate significantly higher alphas than loser funds for quite some time.     

Investing in equity mutual funds

We construct optimal portfolios of equity funds by combining historical returns on funds and passive indexes with prior views about asset pricing and skill. By including both benchmark and nonbenchmark indexes, we distinguish pricing-model inaccuracy from managerial skill. Modest confidence in a pricing model helps construct portfolios with high Sharpe ratios. Investing in active mutual funds can be optimal even for investors who believe managers cannot outperform passive indexes. Optimal portfolios exclude hot-hand funds even for investors who believe momentum is priced. Our large universe of funds offers no close substitutes for the Fama-French and momentum benchmarks.