The performance of Japanese mutual funds

We analyze the performance of Japanese open-type stock mutualfunds for the 1981-1992 period. The results show that, regardlessof the performance measures and benchmarks employed, most ofthe Japanese mutual funds underperform the benchmarks by between3.6% and 10.8% per annum. These funds tend to invest more inlarge stocks with low book-to-market ratios. But this featuredoes not explain the underperformance. A potential explanationis the dilution effect caused by inflows of funds. In Japan,a new investor of an open-type fund only pays in the after-taxvalue of the net asset value. We conduct a bootstrap experimentto assess the magnitude of this dilution effect.