European mutual funds and portfolio's country exposure: does active management add value?

Abstract

Daily fund data and Sharpe's (1992) style methodology are used to evaluate the performance and forecasting skill of European mutual fund managers. Specifically, this study addresses the following question: do European fund managers add value to their investors by actively managing their portfolio's country exposure? To look into this issue, a methodology based on attribution returns is employed. An attribution return is defined as the difference between a fund's actual month t return and the return that would have been generated by the fund month t − 1 portfolio's country exposure. European fund managers, as a group, add value to their investors by managing their portfolio's country exposure as evidenced by a positive mean attribution return. Also, during the same sample period but based on the more traditional performance measure alpha, these funds outperform a regional benchmark and both measures are found to be positively correlated.