Abstract
Purpose The purpose of this paper is to examine the performance of US mutual funds that invest primarily in emerging market equities and bonds. Design/methodology/approach The study adopts the Morningstar classification of mutual funds and uses the Lipper US Mutual Fund Database through FactSet to obtain monthly returns and various metrics for emerging market equity and bond mutual funds covering the period from January 2000 to May 2017. Several descriptive statistics for these funds are reported as well as various risk-adjusted performance measures. Alphas are computed for different sub-periods using different factor models to mitigate potential biases. Findings The results show that diversified emerging market funds generate some significant alphas for their investors during the study period. Emerging market bond funds, on the other hand, do not provide any significant positive alphas; mostly alphas are negative. An analysis of sub-period performance suggests that these funds do not consistently provide excess returns, showing great variations from one period to another. Originality/value The emerging market funds provide US investors with an alternative source of exposure for their portfolios. Emerging markets differ from developed markets on a wide range of market and economic characteristics, including size, liquidity, and regulation. This study contributes to the scarce literature on these types of funds and provides a comprehensive performance assessment against various benchmarks during a period that encompasses significant bear and bull markets across the world.
Highlights
The growth of emerging market economies has been remarkable over the past 35 years
The findings show that diversified emerging market fund managers experience limited success in their search for alphas during 2000 and 2017 while emerging market bond fund managers fail to realize positive alphas in general
We use the standard formulation as follows: Sharpe ratio 1⁄4 RiÀRf si where Ri is the annualized average return of the fund, Rf is the annualized risk-free rate (30-day US Treasury Bill rate), and σi is the annualized standard deviation of fund returns. As this calculation does not depend on a proxy for the market benchmark, it may be appropriate for examining the performance of emerging market funds
Summary
The growth of emerging market economies has been remarkable over the past 35 years. Their share of the global GDP had risen from 21 percent in 1980 to 36 percent by 2014 Coupled with this pace, capital flows to emerging markets have boomed. About 20 percent of this amount is attributable to portfolio flows, defined as the purchases of emerging market stocks and bonds by non-residents of these countries. Plantier (2015) notes that emerging market stocks and bonds held by foreign investors increased from $1.5 trillion in 2005 to roughly $3.5 trillion by 2013, reflecting the investment returns About 20 percent of this amount is attributable to portfolio flows, defined as the purchases of emerging market stocks and bonds by non-residents of these countries. Plantier (2015) notes that emerging market stocks and bonds held by foreign investors increased from $1.5 trillion in 2005 to roughly $3.5 trillion by 2013, reflecting the investment returns
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