Investment Manager Performance Research Articles

Analysis of the influence of asset allocation policy, investment manager performance, and risk level on the performance of Sharia money market mutual funds in Indonesia

Background: Islamic money market mutual funds have become an alternative to conventional investment instruments. This research has novelty in determining the variables of mutual fund performance by combining risk and return factors, asset allocation policy variables, and investment manager performance, which have a high impact on the return and risk level in reducing the risk of loss on investment. In addition, this research was conducted on the performance of Islamic money market mutual funds that have not been studied before. Methods: This research uses data on Islamic money market mutual funds registered with the Financial Services Authority in Indonesia. The performance of Islamic money market mutual funds was calculated using the Sharpe Method and tested using multiple regression analysis. Results: The results showed that the asset allocation policy, investment manager performance, and the level of risk simultaneously have a significant effect on the performance of Islamic money market mutual funds in Indonesia; however, partially, there is no significant effect between (1) the asset allocation policy on the performance of Islamic money market mutual funds in Indonesia: (2) investment manager performance on the performance of Islamic money market mutual funds in Indonesia, and (3) the level of risk on the performance of Islamic money market mutual funds in Indonesia. Conclusions: The results indicated that optimization of returns and risks was needed by considering the composition of asset allocation, choosing the right investment manager, and conducting a good risk level analysis to obtain optimal Islamic money market mutual fund performance.

The Performance of Sharia Equity Fund Investment Manager

Sharia mutual funds are fund raising activities from investors to be managed by investment managers with sharia-based management, namely by not investing funds in companies whose types and scope of business are not in accordance with Islamic sharia. This study was conducted to determine the effect of turnover ratio, expenses ratio, fund size, managerial tenure, and fund selection skills on the performance of sharia mutual fund investment managers in Indonesia. The data used in this study are monthly Net Asset Value, BI rate, IHSG, annual turnover data, annual expenses ratio data, and prospectus of 9 sharia stock mutual funds from December 2014 to December 2018. Samples were taken based on the purposive sampling method during this research. The measurement of the performance of sharia equity fund investment managers uses the Sharpe Ratio method. The method used is multiple linear regression analysis and classic assumption tests using descriptive statistical tests, multicollinearity tests, and heteroscedasticity tests using EVIEWS 10 statistical software. The results of this study indicate that turnover ratio, fund size, fund selection skills significantly influence performance Islamic mutual fund investment manager. While expenses and managerial tenure ratios do not significantly influence the performance of investment managers in Islamic mutual funds.

Uncovering investment management performance using SPIVA data

AbstractWhich performs better, passive or active funds management, a question that both fund managers and academics fiercely debate. Why does fund size matter? These are a number of typical questions that puzzle practitioners and academics alike. To date, the data has been shown to be somewhat problematic. This paper exploits the SPIVA and passive fund datasets with several novel methods in order to build a foundation for unbiased fund performance analysis and comparison. For this, we address a number of questions including: passive versus active management, fund size, time horizon and fund style on performance. We find that in general, passive funds outperform active funds due to lower management costs, larger funds tend to perform better and funds with longer (3+ years) records of accomplishment tend to perform better. Short termism tends to have a significant detrimental effect on performance. We introduce Dynamic Generalized Method of Moments to show that competition has a significant effect on fund performance. Furthermore, this demonstrates that SPIVA data has a significant dynamic panel time series that was largely ignored by prior research. This integrated dataset and associated methods that we illustrate here, provide both academic researchers and industry analysts alike with an environment to investigate and potentially draw conclusions about the fund factors that affect performance without the inherent limitations of the original sources.

Mutual Funds: Skill and Performance

The authors summarize the recent literature on mutual fund manager skill and performance. They discuss the latest contributions in the field and reinterpret them through the lens of the rational expectations framework (efficient market hypothesis). They further discuss the importance of (1) the choice of benchmark model and (2) the time-series and cross-sectional sample selected in performance studies. The article has three main conclusions. First, although net alpha is a measure of the abnormal return of an extra dollar invested in a particular fund (i.e., performance), it does not measure mutual fund manager skill. To measure the latter, the product of gross alpha and the size of the fund—value added—is needed. Second, the set of real-time available index funds is the relevant counterfactual to use when assessing the skill and performance of investment managers. Nontradable factors that are constructed with the benefit of hindsight are not a realistic benchmark. Third, the authors can think of no good reason to exclude high-quality mutual fund data either in the cross section or time series when making inferences regarding skill and performance. <b>TOPICS:</b>Manager selection, mutual fund performance, performance measurement <b>Key Findings</b> • Net alpha is not an appropriate measure of mutual fund manager skill; value added, the product of assets under management and gross alpha, is a measure of mutual fund manager skill. • The set of real-time available index funds is the relevant counterfactual investment opportunity set for assessing skill and performance of investment managers. • Studies of skill and performance should not exclude high-quality data on mutual funds from either the cross section or the time series.

Pricing three cases of performance fees using options methodology

PurposePrior research has demonstrated that investment management performance fees have the characteristic of a call option. It is important to examine whether these performance fees are consistent with traditional fee structures used by investment managers. It is also worth examining whether clients or managers benefit significantly more than the other party under performance fee structures. The paper aims to discuss these issues.Design/methodology/approachThe authors use Black-Scholes options pricing methodology to examine three cases of performance fee structures. The Absolute Hurdle case examines the fee structure where the manager receives a portion of the return over a pre-defined absolute rate of return. The Benchmark Relative Hurdle case shows a fee structure based on performance in excess of the return of a benchmark portfolio. The Breakeven Relative Hurdle case illustrates the fee structure where there is revenue neutrality with the classic management fees when portfolio performance matches the benchmark.FindingsThe findings of this paper illustrate that a particular performance fee structure can be designed to have the same revenue as a traditional investment management fee structure. Such a structure is equally beneficial to both the investment manager and to the client and should have salutary motivational effects to improve investment results, while simultaneously rewarding the manager for value added at a fair price for both the manager and the investor.Originality/valueThis study is unique in that it examines three cases of performance fees and provides a comparison between performance fee structures and traditional investment management fee structures. The findings will assist investment portfolio managers in better setting management fees they charge clients. In addition, this study help with clients who feel they are being charged excessive management fees by their investment manager.

Are Relative Performance Measures Useless?

Each year, hundreds of billions of dollars are moved from one investment manager to another. Frequently, these decisions are based on relative performance measurements over periods of 5 to 10 years. The authors use a Monte Carlo model to test the logic of such an approach by constructing managers that have (1) positive skill, (2) no skill, and (3) negative skill versus their benchmarks. The authors show that the typical positive-skill manager suffers a longest underperformance period (defined as the longest month-to-month period during which the returns for the simulated fund trail those of the benchmark) of approximately 10 years during 15-year simulations. Conversely, managers with negative skill enjoy longest outperformance periods of a similar length. The authors also simulate a series of very skilled managers over a 100-year period and show that, on average, there is a 25-year period in which they underperformed. These findings are confirmed by empirical analysis of the realized performance of 5,500 actively managed funds with 15-year track records from the United States, Canada, the United Kingdom, the Eurozone, Europe ex-euro, and Developed Asia ex-Japan markets. The authors conclude that the standard time frames for evaluating the relative performance of investment managers are insufficient to evaluate the skill of a manager with any degree of confidence. The authors cannot state with confidence that relative performance measures are useless, but the authors can state that they are so when they are employed in the customary fashion. TOPICS:Portfolio management/multi-asset allocation, performance measurement

Integrating Systemic Risk into Modern Portfolio Theory and Practice

Conventional wisdom holds that the performance of investment managers should be measured against some broad market index such as the S&amp;P 500. The broad market averages provide a useful benchmark because they are assumed to be beyond the influence of investment managers and provide a way of capturing what financial economists call “systematic risk,” which is the part of total risk that cannot be avoided through portfolio diversification. But one clear limitation of such an approach to performance evaluation is that by focusing on risks and rewards at the portfolio level only, it fails to consider risks and rewards at a systemic level, where the performance of all portfolios is increasingly likely to be affected.The author begins by making the case that the performance evaluation and collective decision‐making of investment managers could have the effect of increasing the level of systematic risk in both the markets and the real economy. Then, after suggesting that the strength or weakness of environmental, social, and governance (ESG) frameworks can have substantial effects on overall market returns, he discusses a number of efforts currently underway to integrate ESG factors into portfolio‐level decision‐making.The author closes by urging asset owners to take the following three steps to help bridge the gap between investment decision‐making and ESG consequences: (1) acknowledge the connection between investment decision‐making and systems‐level risks and rewards; (2) determine which systemic frameworks are most appropriate and useful for their purposes; and (3) implement investment practices that allow them to manage systemic‐level risks and rewards while simultaneously achieving competitive financial returns in their portfolios. With the help of new measurement and management tools, asset owners can strengthen systemic frameworks, communicate the importance of ESG performance to their investees and investors, and align their efforts with those of governmental and non‐governmental organizations to limit systemic risk.

Look-Ahead Benchmark Bias in Portfolio Performance Evaluation

Performance of investment managers is predominantly evaluated against targeted benchmarks, such as stock, bond, or commodity indices. But most professional databases do not retain time series for companies that drop from the database and do not necessarily track changes in the benchmarks over time. Consequently, standard tests of portfolio performance suffer from <i>look-ahead benchmark bias</i>, meaning that a given strategy is naively backtested against the assets constituting the benchmark of reference at the end of the testing period (i.e., now), rather than at the beginning of the period. In this article, the authors report that look-ahead benchmark bias can be surprisingly large in portfolios of common stocks—up to 8% per annum when the S&amp;P 500 Index is the benchmark. Using CRSP data for the running top 500 U.S. capitalizations over the period 1927–2006, the authors demonstrate that look-ahead benchmark bias can account for a gross overestimation in performance metrics, such as the Sharpe ratio, as well as an underestimation of risk measured, for example, by peak-to-valley drawdowns. A general methodology to test investment strategy properties is advanced by the authors in the context of several random strategies having similar investment constraints. <b>TOPICS:</b>Manager selection, analysis of individual factors/risk premia, VAR and use of alternative risk measures of trading risk

Derivative use, fund flows and investment manager performance

Prior literature which examines the use of derivatives by investment managers does not discern between different types of derivative trading strategies. This study is the first to examine and gather data on a particular type of derivative trading strategy undertaken by investment managers. We examine the extent to which equity fund managers use index futures to manage fund flows and the effect this has on their alpha and market timing measures of performance. Our results show that funds that do not use derivatives exhibit lower returns and negative market timing skills when they experience fund flow. The performance of funds that use derivatives, however, is independent of investor’s liquidity demands. In fact, the unconditional performance of the average user fund is statistically equivalent to the performance of the average non-user fund conditional on zero fund flow. Our results provide evidence that derivatives can be beneficial for mutual fund holders under certain conditions.

Look-Ahead Benchmark Bias in Portfolio Performance Evaluation

Performance of investment managers are evaluated in comparison with benchmarks, such as financial indices. Due to the operational constraint that most professional databases do not track the change of constitution of benchmark portfolios, standard tests of performance suffer from the look-ahead benchmark bias, when they use the assets constituting the benchmarks of reference at the end of the testing period, rather than at the beginning of the period. Here, we report that the look-ahead benchmark bias can exhibit a surprisingly large amplitude for portfolios of common stocks (up to 8% annum for the S&P500 taken as the benchmark) - while most studies have emphasized related survival biases in performance of mutual and hedge funds for which the biases can be expected to be even larger. We use the CRSP database from 1926 to 2006 and analyze the running top 500 US capitalizations to demonstrate that this bias can account for a gross overestimation of performance metrics such as the Sharpe ratio as well as an underestimation of risk, as measured for instance by peak-to-valley drawdowns. We demonstrate the presence of a significant bias in the estimation of the survival and look-ahead biases studied in the literature. A general methodology to test the properties of investment strategies is advanced in terms of random strategies with similar investment constraints.

Derivative Use, Fund Flows and Investment Manager Performance

Derivative Use, Fund Flows and Investment Manager Performance

Fiduciary Selection and Monitoring of Investment Managers Under Daubert: Statistically Testing the Hypothesis that a Money Manager is Better or Worse than Random

Statutory fiduciary standards relevant to the selection of investment managers and the monitoring of investment decisions offer very little operational guidance. The guidance cautions little more than that the fiduciary exercise ordinary prudence, diversify and adhere to modern portfolio theory. No specific process or quantitative measures are defined. The most common approaches to satisfying the fiduciary's need for quantitative specificity, in one form or another, reduce to the mean-variance (risk-reward) metrics that underpin the Capital Asset Pricing Model (CAPM). Though widely employed, the array of risk adjusted performance measures such as the Sharpe Ratio and Morningstar's Star rating system provide only rankings and do not meet the Daubert judicial standard. The Supreme Court in the Daubert decision adopted the proposition that Scientific methodology should be based on generating hypotheses and them to see if they can be falsified... The generated hypotheses should be supported by an articulation of credible principles. There must be more than the ipse dixit of the proponent. Applying the mandate to the context of investment advice, the decision effectively requires that the tools of statistical inference be employed when offering opinion testimony as to the adequacy of an investment manager's performance or process. The solution presented in this paper is to reduce the manager's decision process to a binomial model and then perform a back test. The back testing results are in turn then used to accept or reject the hypothesis that the manager or strategy is more than random and will likely, at some level of statistical significance, outperform the appropriate benchmark. To illustrate the technique and provide operational specificity, a naive best performer strategy is back tested. Over the ten year period studied the strategy has a 20% annual return. Analysis of the illustrative best performer strategy concludes that the estimated success rate is between 51% and 68% with a 93% probability, rejecting the random hypothesis. An articulation of the causal mechanism is discussed. In the binomial model success is defined as the strategy out performing the benchmark in a sample trading period. Mapping the manager's performance to a binomial decision process admits the panoply of runs tests and non parametric analysis available for the binomial model. The results can then be used to monitor the consistency of future performance.

Portfolio Concentration and Investment Manager Performance

This study examines the relationship between investment performance and concentration in active equity portfolios. Active management is dependent on the success of two important components in the investment process - stock selection skill and portfolio management. Our study documents a positive relationship between fund performance and portfolio concentration. The relationship is stronger for stocks in which active managers hold overweight positions, as well as for stocks outside the largest 50 stocks listed on the Australian Stock Exchange (ASX). We find more concentrated funds tend to be those implementing growth styles, having smaller aggregate assets under management, being institutions which are not affiliated with a bank or life-office entity, whose funds experience past period outflows, and who are benchmarked to narrower indexes than the S&P/ASX 300.

Seasonality in Fund Performance: An Examination of the Portfolio Holdings and Trades of Investment Managers

This study examines the extent to which seasonal variation arises across calendar months in the performance of active Australian equity managers. While it is well documented that there is seasonality in equity market returns, it is unknown whether calendar month variation in managed fund performance exists. Employing a unique database of monthly stock holdings, we find evidence consistent with systematic variation in the risk-adjusted performance of active investment managers over the calendar year. Specifically, we find fund performance is higher in the months when corporate earnings are announced. We also document that the performance of fund managers is lower in the months preceding the tax year-end. Finally, we report evidence that investment manager performance is greater than normal in December, possibly due to both window dressing and the Christmas holiday effect. These findings have important implications for investors attempting to exploit anomalies in fund returns by timing their entry and exit points from active equity funds.

Seasonality in Fund Performance: An Examination of the Portfolio Holdings and Trades of Investment Managers

Abstract: This study examines the extent to which seasonal variation arises across calendar months in the performance of active Australian equity managers. While it is well documented that there is seasonality in equity market returns, it is unknown whether calendar month variation in managed fund performance exists. Employing a unique database of monthly stock holdings, we find evidence consistent with systematic variation in the risk‐adjusted performance of active investment managers over the calendar year. Specifically, we find fund performance is higher in the months when corporate earnings are announced. We also document that the performance of fund managers is lower in the months preceding the tax year‐end. Finally, we report evidence that investment manager performance is greater than normal in December, possibly due to both window dressing and the Christmas holiday effect. These findings have important implications for investors attempting to exploit anomalies in fund returns by timing their entry and exit points from active equity funds.

Portfolio Concentration and Investment Manager Performance*

ABSTRACTThis study examines the relationship between investment performance and concentration in active equity portfolios. Active management is dependent on the success of two important components in the investment process – stock selection skill and portfolio management. Our study documents a positive relationship between fund performance and portfolio concentration. The relationship is stronger for stocks in which active managers hold overweight positions, as well as for stocks outside the largest 50 stocks listed on the Australian Stock Exchange (ASX). We find that more concentrated funds tend to be those implementing growth styles, having smaller aggregate assets under management, being institutions that are not affiliated with a bank or life‐office entity, whose funds experience past period outflows, and who are benchmarked to narrower indexes than the S&amp;P/ASX 300.

Using Virtual Reality to Assess Performance Under Uncertainty

Scientific approaches to evaluating investment manager performance have been described in this Journal before. While there are complaints that scientific peer groups are not real, they fit into virtual reality and behavioral constructs that are gaining growing acceptance in the investment community.

Returns from investing in Australian equity superannuation funds, 1991–1999

In this analysis of investment manager performance, two questions are addressed. First, do managers that actively trade stocks create value for investors? Second, can the multifactor model of Gruber capture the cross-section of average fund returns for the Australian setting? The answers from this study are as follows: as an industry, investment managers destroyed value for superannuation investors for the period 1991 through 1999, under-performing passive portfolio returns by 2.80–4.00 per cent per annum on a risk-unadjusted basis and 0.50–0.93 per cent per annum on a risk-adjusted basis. Evidence is provided in support of the four-factor model of Gruber; however, the model fails to capture the impact of investment style for the Australian setting. The findings suggest that Australian superannuation investors would transform their retirement savings into retirement income more efficiently through the use of passive alternatives to the stock selection problem.

The evaluation of active manager returns in a non-symmetrical environment

This paper examines the moments of the active return distributions of investment managers. While Modern Portfolio Theory (MPT) assumes asset return distributions are Gaussian Normal, the empirical evidence overwhelmingly documents asset returns to be leptokurtic and fat-tailed. In addition, the evaluation of investment manager performance has relied almost exclusively on the CAPM, which assumes investors are only concerned with the interaction between the first and second moments of a return distribution – mean and variance. However, little empirical work exists evaluating the implications for performance measurement methods of taking into account the higher moments of active return distributions - namely skewness and kurtosis. This paper takes up this issue with respect to the performance of funds invested in domestic equities, domestic fixed interest and international equities sectors on behalf of investors in Australia, Canada, Japan, the U.K. and the U.S. First, the paper documents active fund returns distributions to be inconsistent with a Gaussian normal distribution, confirming previous studies examining asset returns. Second, the paper demonstrates the usefulness of the higher moments of fund active return distributions in evaluating portfolio performance and risk. Third, the paper further extends the performance measures to take account of the investors differential preference between added value in rising and falling markets. We conclude that more work needs to be done in all of these areas but that this paper provides a very useful step along the way. JEL classification: G10, G23

Assessing the Usefulness of the AIMR's Standards for Measuring Investment Manager Performance

Assessing the Usefulness of the AIMR's Standards for Measuring Investment Manager Performance