Italian Mutual Funds Research Articles

The Performance of Market‐Timing Strategies of Italian Mutual Fund Investors

In this paper, we show that simple buy‐and‐hold strategies over‐perform market‐timing strategies effectively used by Italian investors in equity mutual funds. We estimate returns from market‐timing strategies using aggregate data on net flows for a large sample of equity mutual funds, available to Italian investors, that buy stocks in the following markets: Europe and the euro area, the United States and Emerging markets. In all cases, buy‐and‐hold over‐performs market‐timing with extra returns that go from 0.24 per cent per quarter (Europe and euro area) to 0.87 per cent per quarter (US market). These differences are not explained by differences in risk and risk exposure. Investors should re‐consider their investment strategies and choose cheaper, in terms of fees and simpler, in terms of portfolio allocation, passive strategies.

Liquidity Transformation and Financial Stability: Evidence from the Cash Management of Open-End Italian Mutual Funds

A key structural vulnerability of open-end mutual funds is the potential liquidity mismatch between assets and liabilities. In this paper we study the management of liquidity transformation by open-end mutual funds through cash holdings and its potential implications for financial stability. Using supervisory data on Italian equity funds, we show that the amount of cash holdings reduces the probability that funds experiencing significant outflows make forced sales of assets that can potentially dislocate market valuations from fundamentals. Moreover, our results indicate that funds engaging in forced sales hold statistically more cash at the end of a month of financial distress than funds in financial distress that do not engage in forced sales. This evidence is consistent with recent empirical findings showing that funds facing significant redemptions may exacerbate periods of market stress by hoarding cash.

The performance of the Italian mutual funds: Does the metric matter?

This paper discusses the differences among performance metrics in the Italian mutual fund industry. This industry is worthy of interest because it presents two characteristics (representative of other Continental Europe countries, less analyzed than Anglo-Saxon ones) that weaken the importance of the time-weighted approach: a dominant role of the sellers and a significant vertical integration between production and distribution. Based on an original dataset, never used before by any scholar, we simulate (by using a Monte Carlo simulation model) the dynamics of returns and cash flows in the 2003–2010 period, analyzing the metric spreads and their sensitivity to scenarios’ characteristics (volatility and timing of returns, entity and volatility of subscriptions and withdrawals). The empirical findings suggest that metrics matter. In fact, spreads between time-weighted and money-weighted returns are significant at level of individual funds in the simulated scenarios (consistent with the dynamics of the Italian industry in the considered period), while are not significant when we consider aggregated data, since aggregation smooths the volatility of flows and returns. The analysis suggests that it would be useful: (i) to rethink asset managers’ choices in terms of performance measurement; (ii) to provide all the measures of return that could satisfy the broad spectrum of interested parties and assessment purposes.

The Performance of the Italian Mutual Funds: Does the Metric Matter?

The Italian mutual fund industry is in a severe crisis: its net assets have been experiencing a constant decrease since 1999, from 42% of GDP to 8% in 2011. Its returns are poor, too. An investment in mutual funds has accumulated in its 28-year life a loss larger than the initial asset value, if compared with an investment in the one-year treasury bonds; Mediobanca (2012) estimates a destruction of value generated by the former over the last ten years of about 90 billion Euros, that would be even larger considering the risk premium on the portion of funds invested in equity.However, there is a debate about the metrics to be used for measuring returns. Based on an original dataset of the Italian open mutual funds, never used before by any scholar, we simulate the dynamics of returns and cash-flows in the period 2003-2010, and analyze the spread among different metrics, arguing on their appropriateness for evaluating performance from different perspectives and taking into consideration the specific features of the Italian fund industry.

Mutual Fund Incentive Fees: Determinants and Effects

We investigate the how and why of performance fee provisions in a free contracting environment such as the Italian mutual fund market until 2006. We find weak support for the hypothesis that these provisions emerge as an economically efficient solution in a rational asset management industry plagued by asymmetric information. They appear to emerge mainly as the product of strategic pricing by asset managers wishing to ease market competition, leverage on investors' sentiment, and hedge their cost structure. Alternatively, fears that managers may opportunistically alter funds' investment policies to maximize the option value embedded in the incentive provisions appear unjustified.

Relative benchmark rating and persistence analysis: Evidence from Italian equity funds

The recent introduction into the Italian mutual fund market of Morningstar performance rating of private institutions gives rise to the question of what is the relation between this relative benchmark measure and the other traditional performance measures. This paper provides a comprehensive analysis of the relative benchmark performance measure (Morningstar rating) applied to Italian equity funds. It is found that this performance measure is highly correlated with the classical performance measures (Sharpe ratio, Sortino ratio and Treynor ratio) and poorly correlated with the customized benchmark measure (Information ratio). Furthermore, performing a persistence analysis, using non-parametric methods Cross-product Ratio and Chi-squared test, it is observed that only the Morningstar rating measure generates a strong degree of persistence. These results deviate from most European studies, which argue that Italian mutual funds display weak persistence.

Corporate governance in Italy after the 1998 reform: What role for institutional investors?

his paper tries to answer two questions: first, whether the changes in the law resulting from the 1998 reform are able to positively affect the attitude to activism of institutional investors in Italy; and second, whether, legal rules aside, it is reasonable to expect significant institutional investor activism in Italy. We provide both an empirical analysis of the factors affecting institutional investor activism in Italy and a legal analysis of the most relevant changes in the Italian mutual funds and corporate laws, following the 1998 reform. The empirical analysis shows that institutional shareholdings and investment strategies are compatible with the hypothesis that institutional investors can play a significant role in the corporate governance of Italian listed companies. However, a curb to their playing such an active role may derive from the predominance of mutual fund management companies belonging to banking groups (giving rise to conflicts of interest) and from the prevailing ownership structure of listed companies, which are still dominated by controlling shareholders holding stakes higher than, or close to, the majority of the capital (implying a weaker bargaining power of institutions vis-à-vis controllers). The analysis of the legal changes prompted by the 1998 financial markets and corporate law reform indicates that the legal environment is now definitely more favorable to institutional investor activism than before. However, the Italian legal environment proves still to be little favorable to institutional investor activism, when compared to that of the U.S. or the U.K.

Clustering financial time series: an application to mutual funds style analysis

Classification can be useful in giving a synthetic and informative description of contexts characterized by high degrees of complexity. Different approaches could be adopted to tackle the classification problem: statistical tools may contribute to increase the degree of confidence in the classification scheme. A classification algorithm for mutual funds style analysis is proposed, which combines different statistical techniques and exploits information readily available at low cost. Objective, representative, consistent and empirically testable classification schemes are strongly sought for in this field in order to give reliable information to investors and fund managers who are interested in evaluating and comparing different financial products. Institutional classification schemes, when available, do not always provide consistent and representative peer groups of funds. A “return-based” classification scheme is proposed, which aims at identifying mutual funds’ styles by analysing time series of past returns. The proposed classification procedure consists of three basic steps: (a) a dimensionality reduction step based on principal component analysis, (b) a clustering step that exploits a robust evolutionary clustering methodology, and (c) a style identification step via a constrained regression model first proposed by William Sharpe. The algorithm is tested on a sample of Italian mutual funds and achieves satisfactory results with respect to (i) the agreement with the existing institutional classification and (ii) the explanatory power of out of sample variability in the cross-section of returns.

Italian Equity Funds: Efficiency and Performance Persistence

Have Italian mutual funds been able to generate extra-return? Were some of them able to persistently beat the competitors? In this paper we address these questions and provide a detailed and systematic performance and return persistence analysis of the Italian equity mutual funds. We show that, in general, fund managers have not been able to score extra-performances and only few managers had stock picking ability or market timing ability. This evidence is consistent with the market efficiency hypothesis. Moreover, concerning performance persistence, first, we cannot trace out the hot-hand phenomenon on raw returns. The no persistence effect is fairly robust to: the performance measure, the temporal lag and the different methodology employed for testing persistence. Second, there has not been long-run persistence on risk-adjusted returns (we find a weak evidence of the reversal effect). Finally, the past performance displays weak evidence of the hot-hand effect on risk-adjusted returns on four-month using cross-section tests. However, as soon as we analyse yearly intervals any evidence of persistence disappears.

Italian Equity Funds: Efficiency and Performance Persistence

Have Italian mutual funds been able to generate extra-return? Were some of them able to persistently beat the competitors? In this paper we address thee question and provide a detailed and systematic performance and return persistence analysis of the Italian equity mutual funds. We show that, in general, fund managers have not benn able to score extra-performances and only few managers had stock picking ability or market timing ability. This evidence is consistent with the market efficiency hypothesis. Moreover, concerning performance persistence, first, we cannot trace out the hot-hand phenomenon on raw returns. The no persistence effect is fairly robust to: the performance measure, the temporal lag and the different methodology employed for testing persistence. Second, there has not been long-run persistence on risk-adjusted returns (we find a weak evidence of the reversal effect). Finally, the past performance displays weak evidence of the hot-hand effect on risk-adjusted returns on four-month using cross-section tests. However, as soon as we analyse yearly intervals any evidence of persistence disappears.

Corporate Governance in Italy After the 1998 Reform: What Role for Institutional Investors?

In February 1998 the Italian Government passed an Act reforming the law on financial services, stock exchanges and listed companies. With regard to listed companies, the reform was intended to strengthen minority shareholders' rights. The idea behind the new rules on corporate governance was that active institutional investors would make use, if necessary, of these rights in their monitoring of listed companies. A reduction of the agency costs stemming from the separation between ownership and control in listed companies would follow, with beneficial effects for shareholders' wealth and for the Italian economy as a whole. This paper tries to answer two questions: first, whether the changes in the law resulting from the 1998 reform encourage institutional investor activism in Italy; and second, whether, legal rules aside, it is reasonable to expect significant institutional investor activism in Italy. We provide, then, both an empirical analysis of the factors affecting institutional investor activism in Italy and a legal analysis of the most relevant changes in the Italian mutual funds and corporate laws, following the 1998 reform. The former analysis shows that institutional shareholdings and investment strategies are compatible with the hypothesis that institutional investors can play a significant role in the corporate governance of Italian listed companies. However, a curb to their playing such an active role may derive from the predominance of mutual fund managers belonging to banking groups (giving rise to conflicts of interest) and from the prevailing ownership structure of listed companies, which are still dominated by controlling shareholders holding stakes higher than, or close to, the majority of the capital (implying a weaker bargaining power of institutions vis-a-vis controllers). The analysis of the legal changes prompted by the 1998 financial markets and corporate law reform indicates that the legal environment is now definitely more favorable to institutional investor activism than before. However, the Italian legal environment proves still to be little favorable to institutional investor activism, when compared to that of the U.S. or the U.K.