Fund Manager Skill Research Articles

Which investors support the transition toward a low-carbon economy? Exit and Voice in mutual funds

Reducing portfolio carbon footprints (Exit) and voting in favor of climate-related shareholder proposals (Voice) are among the main actions that investors can take to promote an accelerated transition toward a low-carbon economy. This paper studies three important investor groups that can be instrumental in driving the transition and evaluates their Exit and Voice behavior. I find that the five largest asset managers perform poorly on Exit and Voice over the full sample period but improved on both in more recent years. Only a small fraction of signatories to sustainable investor initiatives are supportive of the transition. Counterintuitively, investors who perform poorly on Exit, perform well on Voice. Finally, I examine the financial consequences of employing Exit and Voice and find that Exit is positively related to risk-adjusted fund returns; however, this is not necessarily attributable to superior skill of fund managers.

Network of public equity funds and investment performance in South Korea

Using overlapped portfolio data on public equity funds in Korea, the authors construct several types of fund-stock weighted bipartite networks and measure fund network centrality. The authors also examine the relationship between network centrality and fund investment performance. The authors' results are three-fold. First, the authors find that the fund centrality of the network in which funds and stocks are connected based on the most active investing behavior positively affects the fund performance. Second, the funds with a high centrality level based on the same network generate higher returns by holding stocks with high value uncertainty. Third, the authors find that fund centrality is not associated with herd behavior. Based on these results, the authors argue that fund centrality is a proxy of information advantage and skill of fund managers. The authors' paper shows that network analysis could be a new way to identify funds with better performance and measure the skill and information advantage to construct an optimal portfolio.

Analyzing the Performance of Pakistan Equity Mutual Funds Using Multifactor Models: Pre-COVID Analysis

Previous literature has primarily focused on examining the determinants that impact mutual fund returns in developed and emerging economies. However, there is a dearth of empirical research on how multifactor models are associated with mutual fund returns in underdeveloped economies. The inconsistent literature regarding the efficiency of the literature posed a question of whether the fund managers can generate extra returns for the investors. To address this research gap, this study aims to analyze mutual fund returns using multifactor models, specifically the Capital Asset Pricing Model (CAPM), Fama-French three-factor model, Carhart four-factor model, Treynor-Mazuy and Fama Net-Selectivity. The first three models analyze the funds with four factors: market factor, growth factor, value factor and momentum factor. The results of the study indicate that the risk premium factor plays a crucial role in understanding mutual fund returns, as it exhibits significant value across all three models. However, the value and size factors were found to be insignificant in both the Fama-French and Carhart models. Additionally, the momentum factor was not significant in the Carhart model. Notably, the significant alpha observed in all multifactor models suggests the skill of mutual fund managers, which was further confirmed using the Treynor-Mazuy and Fama Net-Selectivity models to assess their timing and selectivity abilities in actively managed funds. Furthermore, the finding of the study suggests the inefficiency of the market. The investors could earn extra return from their investments. However, the managers play important role in generating the abnormal returns as suggested by Treynor-Mazuy and Fama Net-selectivity model significance. In addition to that, investors should consider the market risk premium in their investment returns.

A Fuzzy-Set Qualitative Comparative Analysis of Causal Configurations Influencing Mutual Fund Performance: The Role of Fund Manager Skill

A mutual fund is a common instrument for households and corporations to invest in the financial markets through diversified portfolios of securities. Investing in managed mutual funds involves relying on a fund manager’s knowledge, expertise, and investment strategy to beat the fund’s benchmark. The purpose of this paper is to help mutual fund investors in their fund selection process. The fuzzy-set qualitative comparative analysis (fsQCA) is the methodology applied to identify combinations of factors that facilitate the selection of performing mutual funds. The goal is to determine whether fund manager skill, as measured by Jensen’s Alpha and other qualitative factors, is a key driver of performance. Our research focuses on US-registered equity funds with a global investing scope over a 5-year period (2016–2021), and we combine three mutual fund databases to obtain more complete data while enhancing data accuracy and consistency. The findings reveal that both manager skill and fund size are pervasive factors included in all three successful combinations of sufficiency conditions leading to high-performance funds. In addition, it is verified that manager skill is the only necessary condition to ensure high returns on mutual funds. Investors’ fund selection process is a cumbersome task that can be simplified with the successful recipes provided by the fsQCA model.

Machine-learning the skill of mutual fund managers

We show, using machine learning, that fund characteristics can consistently differentiate high from low-performing mutual funds, before and after fees. The outperformance persists for more than three years. Fund momentum and fund flow are the most important predictors of future risk-adjusted fund performance, while characteristics of the stocks that funds hold are not predictive. Returns of predictive long-short portfolios are higher following a period of high sentiment. Our estimation with neural networks enables us to uncover novel and substantial interaction effects between sentiment and both fund flow and fund momentum.

Is anti-herding always a smart choice? Evidence from mutual funds

Recent empirical studies document a negative relation between herding behaviour and the skill of mutual fund managers. We explore this relationship further by focusing on fund managers' contrarian buy and sell behaviour against the market. Our study reveals an asymmetry in the performance of mutual funds with contrarian buy behaviour and contrarian sell behaviour. The contrarian-buy behaviour reflects skill by positively predicting the cross-section of next period's mutual fund returns, while the contrarian-sell behaviour reflects a lack of skill associated with a negative prediction. These findings are robust to various risk-adjusted performance measures. Contrarian-buy funds outperform momentum-buy funds by 3% per year, while contrarian-sell funds underperform momentum-sell peers by about 4%. These findings are robust across different sizes and styles of mutual funds. Further analysis indicates that the asymmetric effect is reversed during recessions and disappears when market sentiment is high. We also study how mutual fund characteristics relate to contrarian buy and sell practices. We find that mutual funds with larger size, higher flow, lower tracking error, and no manager ownership are more likely to buy against the crowd but sell with the crowd.

Stock Selection and Market Timing Ability of Nepalese Mutual Funds

This study evaluates the performance of Nepalese mutual fund managers’ stock selection and market timing abilities. This study performed the investigation on the weekly data of 5 mutual funds from December 28, 2017 to March 2, 2023 spanning 270 weeks. To serve our objective, the stock selection skills of the fund managers were assessed using average return, Sharpe ratio, Treynor ratio, Information ratio and Jensen’s alpha. The study found strong evidence supporting risk management ability in all of the mutual fund schemes as demonstrated by beta coefficient below unity and significant stock selection ability in 2 out of the 5 mutual fund schemes. Furthermore, the positive values of alpha although not statistically significant indicates stock selection ability of the fund managers. On the other hand, Treynor and Mazuy’s Unconditional Market timing model was employed to test the market timing skill of fund managers. The test results did not indicate any significant positive market timing skills but one of the mutual fund schemes exhibited statistically significant negative market timing. Thus, the Nepalese fund managers aptly demonstrated stock selection ability but they did not demonstrate any positive market timing skills indicating that fund managers typically relied on stock selection to outperform the Benchmark Index rather than market timing skills. Int. J. Soc. Sc. Manage. Vol. 10, Issue-3: 47-54.

When Unconscious Desires Motivate Fund Selection: Active Share and Position Count May Do More to Relieve Angst Than Identify Skill

Identifying equity funds that are likely to outperform remains a daunting task for capital allocators. Traditional portfolio analyses provide useful insights into how a fund is being managed, but offer little clarity on the potential for ongoing success. Active share and position count were introduced as metrics that identify funds that will generate excess returns via skilled management. But this article argues that these metrics provide no information regarding future fund performance or manager skill. We further propose that active share and position count do more to relieve unconscious anxiety provoked during the allocation process than to enhance rigorous judgment.

Economic policy uncertainty and fund flow performance sensitivity: Evidence from New Zealand

AbstractUtilizing a large sample of actively managed equity funds and a recently developed EPU index for New Zealand, we show that fund flow performance sensitivity decreases with policy uncertainty. The role of policy uncertainty as a determinant of fund flow performance sensitivity is found to be stronger, particularly for funds with global focus, large sized funds, high momentum funds and those with high idiosyncratic volatility and low downside risk. The findings support the argument that high policy uncertainty dampens investors' ability to process information that allows them to distinguish fund manager skill from luck. The results remain strong after accounting for various macroeconomic factors.

Time-varying fund manager skills of socially responsible investing (SRI) funds in developed and emerging markets

We examine stock selectivity and timing abilities in the market-wide return, volatility and liquidity of SRI fund managers. We find that multi-dimensional fund manager skills are time-varying and persistent in the short run, with developed market funds exhibiting longer persistence in all dimensions. Fund manager skills tend to be affected by fund characteristics (i.e., expense ratio, fund size, turnover and management tenure) and market characteristics (i.e., ESG market capitalization, mandatory ESG regulation and 10–2 yield spread). Fund managers of developed (emerging) market funds outperform (underperform) the market indices. For both fund types, fund managers possess exceptional volatility and liquidity timing despite poor return timing. Moreover, fund managers focus more (less) on timing the market’s return and less (more) on picking stocks when the prospect of recession keeps increasing (decreasing). Interestingly, if fund managers attempt to time the market-wide return or liquidity, stock selectivity will be worsened by their timing behavior.

ESG Skill of Mutual Fund Managers

ESG Skill of Mutual Fund Managers

Moving to Greener Pastures Does Hedge Fund Manager Skill Persist Across Asset Classes?

Moving to Greener Pastures Does Hedge Fund Manager Skill Persist Across Asset Classes?

Do manager characteristics matter in equity mutual fund performance? New evidence based on the double-adjusted alpha

Numerous studies investigate the relationships between fund manager characteristics and fund performance. However, most evaluate fund performance by using traditional factor alphas, such as the Fama–French–Carhart four- and six-factor alphas. In the present study, we analyze data from Taiwanese equity mutual funds from January 2009 to December 2018 and reevaluate the relationships between fund manager characteristics (namely gender, education level, and tenure) and fund performance by using a recently proposed performance measure: the double-adjusted alpha. Double-adjusted alphas reflect fund manager skill more accurately than do the traditional four- or six-factor alphas because they control for returns attributable to fund holding characteristics. In contrast to the fact that team management has become the dominant management structure in the U.S. recently, domestic mutual funds in Taiwan are all managed by solo managers, and one manager can manage more than one fund. This solitary working environment in Taiwan's domestic fund industry motivates us to re-examine the relationship between fund performance and characteristics of these solitary managers at the manager level but through using the recently developed double-adjusted alpha method.Our results indicate that female fund managers tend to achieve higher double-adjusted alphas than do male competitors, with the difference remaining significant over the 1, 6, and 12 months following the initial ranking month. Managers' education level and tenure do not have any statistically significant effect on either the double-adjusted four- or six-factor alpha values. However, using the traditional factor alpha measures would lead to different and misleading results. In contrast to the current literature, our findings provide new insights into the relationships between fund manager characteristics and fund performance.

AN EMPIRICAL ANALYSIS OF FACTORS INFLUENCING PERFORMANCE OF SHARIAH MUTUAL FUNDS IN INDONESIA

This paper aims to identify the factors that affect the performance of shariah mutual funds. This study uses SEM to test the factors that hypothetically influence mutual fund performance, namely mutual fund manager skills, characteristics, and analyst coverage. This study uses a sample of 45 mutual funds registered with the OJK [financial services authority] for at least three years: equity funds, fixed-income funds, and mixed funds. The results indicate that fund manager skills negatively influence mutual fund performance but not significantly. In addition, the characteristics positively affect the mutual fund performance but are insignificant. Last, analyst coverage is positively influencing the mutual fund performance significantly. The results provide information that would benefit the investors in predicting the performance of shariah mutual funds and the fund managers to improve the performance of their managed funds. Further research will ascertain the inability of market-timing skills and asset allocation strategies to improve mutual fund performance.

‘Smart’ copycat mutual funds: on the performance of partial imitation strategies

Using a novel measure of stock-level trade imitation, we uncover ‘smart’ copycats: fund managers that use their own information when beneficial, and otherwise imitate other managers’ better trades. Contrary to previous research, we find that these partial imitation strategies lead to outperformance. Our ‘Copycat Score’ combines the propensity to imitate and to lead trades. Funds at the high and low ends of the score outperform all others. The Copycat Score is persistent in time, related to other measures of skill, and a good predictor of fund performance. We conclude that smart copycatting is another skill of successful fund managers.

Are mutual fund managers good gamblers?

Lottery stocks have been shown to severely underperform on average. I find that from 1980 to 2016, while the average stock held by U.S. equity mutual fund managers outperforms those they do not hold by 3.8% per year, lottery stocks held by mutual funds outperform those they avoid by 24%. I find that a fund's loading on lottery stocks is a good predictor of future performance. Lottery stock loading is also correlated with various measures of fund manager skill. Investors can benefit from this information either to find skillful fund managers or to build a profitable copycat portfolio.

Fund manager skill: selling matters more!

We examine whether mutual fund managers have differential skill in the buy and sell domains. Although they have characteristic-timing ability in aggregate, we show they exhibit asymmetric ability when buying and selling. Our key finding is that fund managers with superior selling ability are significantly better at buying stocks and, as a result, earn significantly higher aggregate returns. However, fund managers who buy stocks successfully do not necessarily have parallel selling skills, leading to lower returns overall. Thus, we provide strong evidence that selling skill is the key determinant of overall mutual fund timing performance.

Comparing SRI funds to conventional funds using a PCA methodology

In this paper, we investigate characteristic differences between Socially Responsible Investment (SRI) funds and conventional funds across 35 different categories, including previously unexplored areas, such as fund manager skills and investment strategies. Further, we examine SRI and conventional funds globally rather than from just one country (e.g., US) or one region (e.g., Europe), covering funds listed in 22 different countries. We also adopt a new Principal Component Analysis (PCA) methodology for matching SRI funds against their conventional counterparts that significantly increases the sample size from previous studies, reducing selection bias and possibly explaining contradictory findings in the prior literature. Contributing to the literature, our findings show that: (i) SRI funds have more diversified portfolios than conventional funds; (ii) SRI funds have lower cash holdings while investing more in US equities; and (iii) SRI fund managers charge a smaller fee and are more successful in managing their portfolios. This is reassuring for investors who invest in SRI funds and for the future health and sustainability of the planet.

REIT Unit Investment Trusts and Fund Manager Skill

This article examines fund manager skill using a sample of real estate investment trust unit investment trusts (REIT UITs). Since REIT UITs are limited to a single industry and since the fund managers do not trade, REIT UITs present an ideal sample to study fund manager stock-selection skill. Using a hand-collected sample of REIT UITs from May 2009 to July 2015, this article finds that REIT UITs do not deliver a statistically significant positive alpha. This is the first article to investigate fund manager stock-selection skill in REIT UITs and contributes to the literature evaluating the effectiveness of active fund management.

MAKING A COMPELLING CASE FOR ESG & ISLAMIC FUNDS: AN EMPIRICAL INVESTIGATION IN COMPARISON WITH CONVENTIONAL FUNDS

The purpose of this research is to analyze and evaluate the performance of ESG funds and Islamic funds vis-à-vis conventional mutual funds, whereby ESG funds and Islamic funds take into account environmental, social, governance and Shariah-based factors into account during portfolio structuring. To conduct this study, the approach primarily employed the publicly available data of thirty funds from each aforementioned category, calculated their logarithmic returns based on closing prices and subsequently ranked the funds according to the returns. Ten of the top-ranking funds were then selected (owing to some limitations of market data availability) for the methodology to calculate performance using descriptive statistics, one-sample t-tests, portfolio performance measures (Sharpe ratio, Treynor ratio, Jensen’s Alpha) and the well renowned Fama-French three-factor model. The results show that much of the excess returns across a majority of the funds (in all categories) are largely explained by the market premium, while the fund manager skill, SMB and HML factors do not lend much weight in explaining the excess returns attributable to the funds. Furthermore, a considerable finding of this study is that ESG and Islamic funds are not underperforming, but exhibit resilience, and has the potential to evolve and become mainstream options for investments.