Active Mutual Funds Research Articles

The Historical Record on Active vs. Passive Mutual Fund Performance

This study examines the risk-adjusted performance of actively managed mutual funds vs. passively managed mutual funds between 1991 and 2019 and finds that there is no statistically significant difference in performance between the two types of funds when the passively managed funds are compared to competitively priced actively managed funds. The practical implication of this study is that, setting tax considerations aside, as long as investors are cost-conscious in their fund selection process, investing in passively managed funds does not meaningfully improve investor outcomes.

Disclosure of Mutual Fund Holdings and Insider Trading Profitability

We show that the 2004 SEC regulation requiring more frequent disclosures from active mutual funds unintendedly increased the profitability of trading by another set of informed investors, namely insiders. Cross-sectional analyses suggest that this increase in insiders’ profits is due to mutual funds’ reduced incentives to collect costly long-term information. We do not find evidence that this effect is driven by either liquidity changes or changes in the opportunities for insiders to learn from fund disclosures. While the greater profitability could reflect insiders’ opportunism, it could potentially relieve firms from short-term pressures exerted by myopic investors affected by the regulation.

Institutional Ownership and Future Stock Returns: An International Perspective

AbstractWe investigate the risk‐adjusted performance of the aggregate equity holdings and trades of 13,807 active mutual funds located in 16 countries between 2001 and 2014. Using portfolio sorts, we find weak evidence that institutional holdings exhibit positive subsequent risk‐adjusted returns. However, any outperformance is unlikely to stem from short‐term informational advantage: stocks bought do not outperform stocks sold in the subsequent quarter. This finding is robust to regressions of subsequent stock returns on changes in institutional ownership and holds for different measurements of institutional trading.

Mutual Fund Manager Educational Background and Activeness

Some active mutual funds are more active than others. Indeed, research has found that many so-called active funds are not nearly as active as they appear as they hold a portfolio that can be quite similar to their benchmark index. Furthermore it has generally been found that funds who are consistently active (hold a portfolio that is quite different from the benchmark) but take positions that are sufficiently well diversified across industries (do not have high tracking error), have better risk-adjusted performance. Given the importance of an active fund being truly active, in this paper we try to predict a fund’s activeness by examining mutual fund manager educational characteristics. After controlling for many factors including the firm at which the fund is located, we find that funds with managers who attend higher mean SAT undergraduate schools are significantly more active than other managers. We also find evidence that funds with younger managers and funds with managers who have a large ownership stake in the fund also are significantly more active.

Fifty Shades of Active and Index Alpha

To explore the rationality and competitiveness of the mutual fund industry, we analyze the alpha of active and index mutual funds from a global sample of more than 60,000 equity and fixed income funds and test the null hypothesis that alphas to investors are zero. We distinguish between institutional and retail investors since there are significant differences in management fees, economies of scale, and information asymmetries between these two groups. Using a new robust statistical test, we cannot reject our null hypothesis for the vast majority of investment categories. We find that the average active fund has less exposure to traditional risk factors, but higher sensitivity to alternative risk premia. Fund persistence and the impact of size and fees add further support to our conclusion that the mutual fund industry is highly competitive, except for US domestic funds. This set of funds is excessively overfunded compared to other fund categories.

Do Teams Perform Better than Singles? : Evidence from the Mutual Fund Industry in Korea

Purpose - The purpose of this paper is to investigate the potential benefits or detriments of team management on fund performance in the mutual fund market. An additional purpose of this study is to examine the optimal number of managers in a fund industry for superior performance. Research design, data, and methodology - This paper investigates the effect of managerial structure on fund performance in the Korean active mutual fund market between 2001 and 2008. For this, we analyze two risk-adjusted performances measures- the capital asset pricing model (CAPM) and the three-factor model of Fama & French (1993). Results - First, we found that single-managed funds exhibited superior performance. Second major finding was that as the number of managers in a fund increases, the fund performance deteriorates. Finally, the results reveal that the sharpest performance drop occurs when team size increases from a 5-person team to a 6-person team. Conclusions - The results suggest that the management structure can be a source of competitive advantage for fund performance. As considering fund performance is the outcome of managers' decision-making, this study contributes to not only the financial literature but also the literature in other areas, such as management and general business.

The Historical Record on Active vs. Passive Mutual Fund Performance

The Historical Record on Active vs. Passive Mutual Fund Performance

Asset Allocation Strategy to Create Superior Portfolio from Equity Mutual Funds

There are many factors that cause an investor's success or failure in investing. One of the most decisive factors is the strategy to allocate investment assets. Therefore, investors need to allocate his or her assets such that an optimal return is achieved. This study discusses three strategies of asset allocation, namely buy and hold, instalment plan, and rebalancing. Three rebalancing processes are applied; quarterly, semi-annually and annually. Thirty active equity mutual funds from 2008 to 2014 have been used as research sample to calculate the superior portfolio. This study uses the Sharpe ratio to calculate portfolio return. The research result shows that strategic asset allocation with rebalancing strategy is considered the best strategy to be applied by investors. This finding can be used by investors as reference to invest in equity mutual funds to enhance returns.

Distortions Caused by Institutional Securities Lending

Using newly-mandated disclosures, we show some fund managers retain a fraction of securities lending income by employing in-house lending agents. In a model with heterogeneous investors, we find this retention leads funds to overweight high-fee stocks that endogenously underperform. We find empirical evidence consistent with our model's predictions: active mutual funds we identify as fee retainers invest more in high-fee stocks and underperform relative to both non-retaining and non-lending funds. We also show fee retention can explain the negative relation between lending fees and future fee-inclusive stock returns.

Trading is Hazardous to Your Wealth: Evidence from Mutual Funds Around the World

textabstractWe study the trading performance of actively-managed mutual funds from 16 domicile countries investing in 42 equity markets over the period 2001-2014. In the aggregate, funds achieve particularly poor returns in U.S. equity: after adjusting for style, the stocks they buy underperform those they sell by 0.61% per quarter. In non-U.S. equity, mutual fund trades achieve a gross quarterly return of only 0.19%, which appears small relative to trading costs in international markets. The relative size of the active mutual fund industry and the tendency of mutual funds to trade in herds contribute to their poor trading performance. Using the U.S. market as an important case with a longer time series and richer information, we find further supporting evidence.

The Mismatch between Mutual Fund Scale and Skill

I demonstrate that skill and scale are mismatched among actively managed equity mutual funds. Many mutual fund investors confuse the effects of fund exposures to common systematic factors with managerial skill when allocating capital among funds. Active mutual funds with positive factor-related past returns thus accumulate assets to the point that they significantly underperform. I also show that the negative aggregate benchmark-adjusted performance of active equity mutual funds is mainly caused by this small subset of oversized funds.

Investor Overconfidence, Firm Valuation, and Corporate Decisions

Behavioral theory predicts that investor overconfidence leads to overpricing because overconfident investors overestimate the quality of their information and underestimate risk. We test this prediction by using a measure of investor overconfidence derived from the characteristics and holdings of U.S. equity mutual fund managers. We find that firms with more overconfident investors are relatively overvalued based on the market-to-book ratio and a misvaluation measure. The result is stronger among stocks with greater mutual fund ownership, particularly by active mutual funds. Firms with more overconfident investors also exhibit lower subsequent stock returns, issue more equity, and invest more. Overall, our findings suggest that investor overconfidence is significantly related to firm valuation and corporate decisions. The Internet appendix is available at https://doi.org/10.1287/mnsc.2017.2806 . This paper was accepted by Neng Wang, finance.

UK Mutual Fund Performance Persistence with Active Peer Benchmarks

We assess UK mutual fund performance from a perspective of a peer-group, applying a novel approach suggested in Hunter et al. (2014). Our sample comprises of 817 UK long-only active equity mutual funds allocated to nine Morningstar style category peer-groups in the period 1992-2016. Overall, we find that those funds with most significant positive peer-group adjusted alphas continue to perform well one-year-ahead, using both parametric and non-parametric measures of persistence in performance. Further, a small increase in significance of peer-group adjusted alphas significantly improves the probability that a fund will be placed in the top quartile in the following period. Finally, we document that persistence in performance is driven by both winner and loser funds. The results within each peer group by and large conform to these findings.

The 50% Rule: Keep More Profit in Your Wallet

This article evaluates the portion of the profit from various investments—index funds, active mutual funds, private equity funds, and hedge funds—that actually accrue to the taxable owner of the capital at risk. It then compares how the returns to taxable investors compare with tax exempt ones and explores the implications of these differences and their potential impact on investment strategy.

Factor Investing and Risk Allocation: From Traditional to Alternative Risk Premia Harvesting

Sophisticated institutional investors have a growing interest in factor investing, a disciplined approach to portfolio management that is broadly meant to allow investors to harvest risk premia across and within asset classes through liquid and cost-efficient systematic strategies without having to invest with active managers. Although it is now well accepted that the average long-term performance of active mutual fund managers can to a large extent be replicated through a static exposure to traditional long-only risk premia, an outstanding question remains with respect to the best possible approach for harvesting alternative long–short risk premia. The focus of this article is to empirically analyze (1) whether systematic rules-based strategies based on investable versions of traditional and alternative factors allow for satisfactory in-sample and out-of-sample replication of hedge fund performance, and more generally (2) whether suitably designed risk allocation strategies may provide a cost-efficient way for investors to get attractive exposure to alternative factors, regardless of whether they can be regarded as proxies for any particular hedge fund strategy. The main findings can be summarized as follows. On one hand, the authors find that replication models for hedge funds strategies generally achieve a relatively low out-of-sample explanatory power, regardless of the set of factors and the methodologies used. On the other hand, they find that heuristic allocation strategies, such as risk parity strategies, applied to alternative risk factors could be a better alternative to hedge fund replication for efficiently harvesting alternative risk premia.

The Agency Problems of Institutional Investors

Financial economics and corporate governance have long focused on the agency problems between corporate managers and shareholders that result from the dispersion of ownership in large publicly traded corporations. In this paper, we focus on how the rise of institutional investors over the past several decades has transformed the corporate landscape and, in turn, the governance problems of the modern corporation. The rise of institutional investors has led to increased concentration of equity ownership, with most public corporations now having a substantial proportion of their shares held by a small number of institutional investors. At the same time, these institutions are controlled by investment managers, which have their own agency problems vis-à-vis their own beneficial investors. We develop an analytical framework for understanding the agency problems of institutional investors, and apply it to examine the agency problems and behavior of several key types of investment managers, including those that manage mutual funds—both index funds and actively managed funds—and activist hedge funds. We show that index funds have especially poor incentives to engage in stewardship activities that could improve governance and increase value. Activist hedge funds have substantially better incentives than managers of index funds or active mutual funds. While their activities may partially compensate, we show that they do not provide a complete solution for the agency problems of other institutional investors.

Starting on the wrong foot: Seasonality in mutual fund performance

Abstract We document a systematic seasonal component in the aggregate underperformance of active mutual funds. At the aggregate level, active funds underperform the market and other passive benchmarks only in the first month of a quarter. This intra-quarter performance seasonality holds across fund sizes and investment styles. The pattern is consistent with short-term stock return reversal effects along with aggregate window-dressing and, to a lesser extent, NAV-inflation practices around quarter-ends. We find marginal or no evidence of microstructure biases, fund investor flows, or cash distributions as sources of this seasonality. Our findings highlight new features of the active management underperformance puzzle.

KARAKTERISTIK REKSA DANA DAN KINERJA REKSA DANA SAHAM DI INDONESIA

A mutual fund is one of the interesting alternative modes of investment models for the investors that do not have much time, knowledge and expertise in calculating the risk and investment return. This study is aimed to understand the influence of the mutual fund’s characteristics: the expense ratio, fund size, turnover ratio, and the mutual fund’s age towards the mutual fund’s performance in Indonesia. This study has been conducted using the Fixed Effect Model with the White cross-section as the coefficient covariance method at 34 active equity mutual funds that existed in Indonesia during the 2012-2013 period. The result of this study has indicated that the expense ratio and the multi fund’s age have a significant negative towards the the equities mutual funds in Indonesia while the fund size and the turnover ratios have a significant positive influence towards the the equity’s mutual fund’s performance in Indonesia.

How Do Smart Beta ETFs Affect the Asset Management Industry? Evidence from Mutual Fund Flows

Using U.S. and global data, we examine the impact of Smart Beta ETFs on active mutual funds. As Smart Beta ETFs become widely available and actively traded, active mutual fund flows become “smarter”, that is they become more sensitive to multi-factor alphas. Our findings demonstrate how product innovation changes investor behavior and the investment ecosystem. Specifically, multi-factor analyses have become more relevant in performance attribution, and closet factor funds have become targets for replacement by low-cost Smart Beta ETFs.

The Trading Performance of Active Mutual Funds

This paper documents deteriorating trading performance of actively managed mutual funds. During the period 1980-2000, stocks purchased by mutual funds outperform those they sell. After the millennium, however, stocks they purchase underperform those they sell. Adjusting for the size, value, and momentum effects, the deterioration in the trading performance is 1.62% in the first quarter and rises up to 2.51% one year after the trading. Simulation results indicate that the reversal in the trading performance of mutual funds does not merely reflect statistical chance. Instead, an increased tendency of mutual funds to herd appears to drive their trading losses.