Abstract
Despite the lack of convincing evidence that active investment fund managers add value, the number of actively-managed US mutual funds has increased substantially over the last 25 years. While non-sector diversified mutual funds have received much attention, sector funds, except real estate mutual funds (REMFs), have not. In this paper, we provide new and more robust evidence on the performance of active REMFs compared to all actively managed mutual funds. We use the Carhart four-factor model with an additional liquidity factor as a risk-adjusted benchmark. We use wild bootstrap methods to deal with small samples, non-normality and heteroscedasticity, and we control for the false discovery of significant results. For portfolios of fund types, we find evidence of both significant outperformance and underperformance, net of fees, during 1992-2016. We consider non-overlapping five-year and three-year periods and find very limited evidence of persistent outperformance. For individual funds, we find that, for both sector and diversified funds, net of fees, only 0.79% are skilled. We find persistence in skills for only two individual fund managers of diversified funds. We investigate the effects of the outsourcing of management and of team versus individual management. Outsourcing has no effect on performance of non-RE sector funds but, for cap-based funds and style-based funds, it has a negative effect. There is some evidence that this may also be true for REMFs. Team management has no effect for any types of funds. Overall, we conclude that REMFs are generally no different from other sector funds.
Highlights
The ability of active investment fund managers to add value has long been the subject of academic research
If the benchmark is appropriate for assessing risk-adjusted performance, and if some active fund portfolios deliver outperformance, we would expect the test to be significant for active funds and insignificant for passive funds
– Diversified funds differ from sector funds in that they exhibit some limited persistence of significant positive performance within fund types but we identified only two such funds with persistent out-performance in successive periods
Summary
The ability of active investment fund managers to add value has long been the subject of academic research. Between 1992 and 2016, the number of active non-sector diversified mutual funds grew from 1330 to 4179, while mutual funds specialising in a particular industrial sector grew at the same rate, from 169 to 540, but represented only 11 percent of mutual funds.. The previous focus could be justified, in part, by the long history and the relatively large number (173) of real estate funds, and by claimed information inefficiencies in the underlying real estate investment market Such studies compare fund performance to that of a risk-adjusted benchmark and examine the regression constant, alpha, as the measure of differential performance. Overall, these real estate studies provide limited evidence of added value. Nor does any consider the effects of outsourcing or of team versus individual management
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