International Equity Mutual Funds Research Articles

On the Use of Currency Forwards: Evidence from International Equity Mutual Funds

On the Use of Currency Forwards: Evidence from International Equity Mutual Funds

The Geography of Subadvisors, Managerial Structure, and the Performance of International Equity Mutual Funds

Abstract We study whether subadvising abroad provides an information advantage that improves the performance of international equity mutual funds. We find that it does not. In fact, internationally outsourced funds underperform on a risk-adjusted basis by up to 162 bps annually. The underperformance is concentrated in funds managed by single subadvisors, who are less likely to be terminated after poor performance compared to funds with multiple subadvisors. We dissect fund performance by the location of its subadvisors and find that international subadvisors underperform primarily in their local holdings. Finally, we show that the industry is nonetheless on a path toward equilibrium. (JEL G11, G12, G14, G15, G23). Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Is there a home field advantage in global markets?

International equity mutual funds increasingly hire managers from countries linked to their geographic mandate. We show these funds with “home-linked managers” exhibit a strong bias to invest in stocks of the managers' home countries and attract more flows. Portfolios of stocks from countries in which a fund has a home-field advantage outperform those managed by funds without home-linked managers. We are unable to identify specific sources of an information advantage associated with the home-linked manager's performance. But an analysis of fund flows reveals a role of investor trust in home-linked managers earned primarily through past superior performance.

International equity U.S. mutual funds and diversification benefits

This study examines whether U.S. international equity mutual funds provide out-of-sample diversification benefits in the presence of no short selling constraints. Ignoring the economic state, international mutual funds do not provide out-of-sample diversification benefits. However international mutual funds do provide out-of-sample diversification benefits in certain economic states. The benefits are concentrated when the lag one-month U.S. Treasury Bill return is lower than normal.

International Mutual Funds Performance and Persistence across the Universe of Performance Measures

Nous considérons un ensemble exhaustif de 147 mesures de performance de portefeuille, avec leurs variantes. En utilisant un échantillon de 1.625 fonds mutuels investis en actions, une analyse en composantes principales permet d’identifier 18 dimensions de base. Parmi les 7 facteurs les plus importants, 3 présentent une forte persistance dans la performance. Ces facteurs reflètent différentes formes de return incrémental et de performance ajustée à la préférence. Notre article est le premier à apporter des preuves statistiques et économiques que la constitution d’un portefeuille, sur base des valeurs passées de ces facteurs, permet d’obtenir une sur-performance significative.

Does Sub-Advising Abroad Improve the Performance of International Mutual Funds?

We study whether sub-advising abroad provides an information advantage that improves the performance of U.S. international equity mutual funds. We find evidence to the contrary. Funds that hire outsourced international sub-advisors underperform on a risk-adjusted basis by up to 135 bps annually. We further demonstrate that the underperformance of outsourced funds is concentrated in those managed by entrenched single sub-advisors, who are less likely to be terminated after poor performance compared to sub-advisors working in teams. Finally, we dissect a fund’s performance by the geography of its sub-advisors and show that internationally outsourced funds underperform primarily in their local holdings.

Currency Risk and Equity Allocations by International Mutual Funds

We show that international equity mutual funds underweight equity markets with risky currencies and overweight equity markets with less risky ones. This risk-management practice is an important determinant for allocations among foreign equities and can also help explain levels of home bias for individual funds. On average, this leads to a reduction of fund volatility but puts a constraint on stock-picking and performance. Our findings stress the importance of currency risk in explaining equity allocations by professional asset managers around the world.

Equity Market Globalization and Portfolio Rebalancing

This paper examines how the financial globalization affects international equity mutual funds’ portfolio choices in emerging markets. By examining the monthly holdings of 155 international funds, we first show that these funds actively engage in a rebalancing strategy to maintain their risk preferences upon realization of excess return changes. We also document robust evidence that these funds’ propensity of rebalancing is larger in a country whose equity market is more strongly correlated with the global market. The results help understand how the financial globalization may raise the portfolio risk of the international funds’ equity holdings in emerging economies.

Is There a Home Field Advantage in Global Markets?

International equity mutual funds increasingly hire managers from countries linked to their geographic mandate. We show that these funds with “home-linked managers” exhibit a strong bias to invest in stocks of that country and they attract more flows. Portfolios of stocks from countries in which a fund has a home-field advantage outperform those managed by funds without home-linked managers. We are unable to identify specific sources of an information advantage associated with the home-linked managers performance. But an analysis of fund flows reveals a role for investor trust in home-linked managers earned primarily through past superior performance.

Country and industry concentration and the performance of international mutual funds

We examine the relation between country and industry portfolio concentration and performance using a data set of international equity mutual funds. When sorted by concentration measures, funds in the most concentrated quintile outperform those in the most diversified quintile by 0.16% and 0.30% monthly in country and industry dimensions, respectively. Further analysis shows that the superior performance of concentrated funds is largely driven by industry rather than country concentration, suggesting the existence of global industry private information. Finally, we show that industry-concentrated funds rotate top-holding industries less frequently than their diversified counterparts, and that the industries these funds purchase subsequently outperform the industries they sell.

Investment Style and Performance: Evidence for International Equity Mutual Funds

In this paper we study the performance and performance persistence of international equity mutual funds with a focus on fund investment styles. Using a best-fit index methodology, we sort funds yearly based on the style dimensions of size and value/growth, as well as on regional categories (Europe, Pacific and emerging markets). In doing so, we find that (i) the performance of international funds clearly differs regarding style and regional categories, (ii) based on a five-factor alpha, most international style portfolios exhibit performance persistence, and (iii) top performing SMID-cap portfolios and top performing emerging market portfolios show significant and positive alphas. Moreover, using a conditional five-factor alpha as alternative ranking criteria further improves the prediction of future international fund performance.

Mutual Fund Tournaments: Evidence From Global And International Funds

For a sample of global and international equity mutual funds, we test the proposition that managers likely to end up as losers manipulate fund risk differently from interim winners. In contrast with Brown, Harlow, and Starks (1996) who found robust support for the tournament model, we found no evidence of tournament like behavior for international and global mutual funds. A possible explanation of this behavior is that investors in these funds are primarily seeking diversification and therefore are less sensitive to relative performance.

Redemption Fees and the Risk-Adjusted Performance of International Equity Mutual Funds

In the wake of the market timing and late trading mutual fund scandals, many mutual funds adopted redemption fees to limit market timing. In this paper we investigate the impact of redemption fees on the risk-adjusted performance of U.S. based international equity funds, the very funds that many market timers used. We find three interesting results. First, using event study methodology we find that after the introduction of redemption fee there is a significant increase in the risk-adjusted fund performance. Second, we find that funds that introduced larger-size redemption fees have significantly better performance after the introduction of the redemption fee than other funds. Third, we find that the main reason for the improvement in fund performance after the introduction of the redemption fee is due to lower amounts of cash being held by the fund after the redemption fee. In sum our results suggest that implementation of redemption fees are performance enhancing for international equity funds. As such, long-term investors of international equity funds should actively look for international equity funds that have redemption fees.

International Mutual Fund Performance and Political Risk

Recent years have witnessed phenomenal growth in both the number and size of US based international equity mutual funds. While the benefits of international diversification are well documented in the literature, empirical research relating to the performance of international mutual funds has been limited and contradictory. The purpose of this study is to examine the impact of political risk on the risk-adjusted returns of international mutual funds using a modified event study methodology. More specifically, the dummy variable event study methodology using portfolios rather than individual funds is used. This methodology addresses the problems of multiple event days and calendar clustering. The macro political risk event of interest is the Iraqi invasion of Kuwait. Results of the study suggest that shareholders of international equity mutual funds earn significant abnormal returns in the face of political turmoil.

Estimation Risk in Morningstar Fund Ratings

The well-known Morningstar mutual fund star rating system rates funds regardless of age differences. This means the estimates that younger fund ratings are based on have significantly higher estimation risk than the estimates that the ratings of older funds are based on. Investors should be somewhat less confident that the ratings of younger funds are truly what they are estimated to be. The point should be clear in an investigation of 1,281 international equity mutual funds.

Performance persistence of international mutual funds

This study applies the “winner–winner, winner–loser” methodology developed by Brown and Goetzmann, Goetzmann and Ibbotson, and Malkiel to test for short-term performance persistence in international equity mutual funds over the 20-year period from 1977 to 1996. Persistence tests are applied to a database consisting of all international equity funds in existence during this period, varying from a low of 11 (1977) to a high of 473 (1996) funds, reflecting the extremely rapid growth of this asset class over the last 20 years. The authors are not aware of any other persistence studies of international equity funds. The results show statistically significant performance persistence for 1-year holding periods, but no persistence for 2-, 3- or 4-year periods. For 1-year periods, overall, performance persistence is statistically significant at the .001 level. This leads to the conclusion that international equity mutual funds exhibit strong performance persistence for short-term (1-year holding periods), but persistence generally fades after the first year. These results are generally consistent with results found by other researchers using this methodology. Survivorship bias is a concern in virtually all time series studies of mutual fund returns. This bias is minimal in this study because each new fund is added to the database, merging funds continue to be included and adjustments are made for funds that cease operations. The only bias is that if any fund closed and did not merge with an existing fund, that fund would not have returns to be included for the future periods. Only 28 funds ceased operations over the 20-year period during which 490 new funds were introduced.

Estimation Risk in Mutual Fund Ratings: The Case of Morningstar

In this paper we examine estimation risk in the well-known Morningstar mutual fund star rating system. We show that due to using a system that rates funds regardless of age differences, Morningstar has created a situation where the estimates upon which younger funds ratings are based have significantly higher estimation risk than the estimates upon which the ratings of older funds are based. As a result, investors can be somewhat less confident that the ratings of young funds are truly what they are estimated to be. We illustrate our point by investigating 1281 international equity mutual funds.

Comparative measures of performance for U.S.-based international equity mutual funds

This paper compares an international two-index model to an International Arbitrage Pricing Theory (IAPT) two-factor model to evaluate the performance of 37 U.S.-based international mutual funds over the 1985–1993 period. Results from the index model confirm prior research that international funds perform as well as the market proxy. In contrast, the IAPT model implies superior investment performance by the international funds. Moreover, the two models produce different relative performance rankings. Intertemporal comparisons of the models indicate that the multifactor IAPT model better reflects the international equity return-generating process.