US Mutual Funds Research Articles

Are Australian Mutual Fund Fees Related to Fund Performance?

We find that Australian mutual fund fees are generally negatively related to their risk-adjusted performance in periods of low economic activity and negatively related to their unconditional alpha where the unconditional alpha is reflective of periods of both high and low economic activity. Our results hold for retail Australian equity only funds and for large-cap and mid/small cap Australian equity-only mutual funds. This is contrary to the evidence provided by Glode (2011) who finds that for US mutual funds, fund fees are positively related to their risk-adjusted performance in periods of low economic activity and negatively related to their unconditional alpha. However, our results for Australian wholesale funds weakly support Glode’s US based findings.

Do Mutual Funds Perform When It Matters Most to Investors? US Mutual Fund Performance and Risk in Recessions and Expansions

This paper shows that the stylized fact of average mutual fund underperformance documented in the literature stems from expansion periods when funds have statistically significant negative risk-adjusted performance and not recession periods when risk-adjusted fund performance is positive. These results imply that traditional unconditional performance measures understate the value added by active mutual fund managers in recessions, when investors' marginal utility of wealth is high. The risk-adjusted performance (or alpha) difference between recession and expansion periods is statistically and economically significant at 3% to 5% per year. Our findings are based on a novel multi-variate conditional regime-switching performance methodology used to carry out one of the most comprehensive examinations of the performance of US domestic equity mutual funds in recessions and expansions from 1962 to 2005. The findings are robust to the choice of the factor model (including bond and liquidity factor extensions), the use of NBER business cycle dates, fund load, turnover, expenses and percentage of equity holdings.

New Answers and Questions Arising from Corporate Governance Research

New Answers and Questions Arising from Corporate Governance Research

Disposition Effect and Mutual Fund Performance

This article finds strong evidence for the presence of the disposition effect among US mutual fund managers. The analysis can establish a link between the disposition effect and mutual fund characteristics as well as changes in the macroeconomic environment. Managers with a lower disposition effect are found to invest in larger equities with a higher trade volume, a higher past performance, lower idiosyncratic risk, and a higher risk-adjusted performance. However, fund characteristics and the economic environment can only explain a limited amount of the variation in the disposition effect across mutual funds. Using a new methodology to reduce the disposition effect exhibited by mutual fund investments, we find no increase in their profitability. Although statistically significant, the disposition effect has only a minor economic effect on fund performance.

Control of Luck in Measuring Investment Fund Performance*

This paper applies an efficient method for Korean investment funds that controls luck in fund performance measurement and classification. Unlike the case of US mutual funds, a large proportion of Korean investment funds are estimated to be skilled funds. Furthermore, the Korean investment fund industry does not show a conspicuous pattern of decline in the proportion of skilled funds over time as shown by its US counterpart. Other issues around fund performance measurement such as fund fees, efficient fund portfolio selection, and the choice of the asset pricing model are also addressed. Finally, we propose to measure fund performance on a relative basis.

The Factor Structure of Mutual Fund Flows

Common flow factors explain significant fractions of annual and quarterly flows to US mutual funds. Common flow factors are highly autocorrelated and are correlated with financial market yields, macroeconomic variables, investor confidence and market volatility at various leads and lags. The systematic components of flows differ across funds according to funds’ “flow betas.” Equity fund flow betas depend on past performance and fund characteristics, such as size, age and expense ratios. High flow beta funds offer significantly lower subsequent returns. Decomposing mutual fund flows into common and idiosyncratic components also generates new insights about the “flow-performance” relation in equity funds first observed by Ippolito (1992) and the “smart money” effect in fund flows first documented by Gruber (1996).

The Wisdom of Crowds: Mutual Fund Investors' Aggregate Asset Allocation Decisions

We find that the aggregate asset allocation decisions of US mutual fund investors depend on economic conditions. Both anticipated economic downturns and periods of turmoil lead investors to direct flow away from risky equity funds and towards lower-risk money market funds. These patterns are markedly stronger for investors in low cost and low turnover funds relative to investors in high cost and high turnover funds, consistent with sophisticated investors being more sensitive to changing conditions. Benchmarked against a buy-and-hold strategy, these asset allocation strategies reduce risk without degrading the risk-return trade-off. Our evidence suggests that individual investors, often dismissed as noise traders, collectively react to economic signals in a sensible manner when determining asset allocations.

Performance Manipulation and Manipulation-Proof Performance Measures: An Empirical Study in US Mutual Fund Industry

Performance Manipulation and Manipulation-Proof Performance Measures: An Empirical Study in US Mutual Fund Industry

Non-parametric frontier estimates of mutual fund performance using C- and L-moments: Some specification tests

There is a burgeoning literature using non-parametric frontier methods to measure mutual fund performance. These articles measure the relationship between the various characteristics (mainly return information and some costs of ownership) of these specialized financial products to establish a ranking using some efficiency measure. We argue in favor of the use of the shortage function, which is compatible with general investor preferences, and question some of the often maintained hypotheses in this line of research. The empirical part employs a large database of US and European mutual funds to offer extensive tests of the underlying modeling assumptions using various frontier estimators.

What drives the performance of convertible-bond funds?

This paper examines the performance of US mutual funds that invest primarily in convertible bonds. Multivariate cross-sectional analyses show a significant relation between a fund’s performance and its asset composition: the higher the difference in the percentage of assets invested in convertible bonds compared to the percentage invested in stocks, the higher the performance, on average. We show that this result can be explained by factors associated with investment opportunities in the convertible-bond market and trading strategies related to convertible arbitrage, as typically performed by hedge funds. Overall, convertible-bond fund performance measured by alpha is comparable to a passive investment in stocks, bonds, and convertible bonds. This performance is the result of weak selection skills and successful timing strategies related to convertible arbitrage.

The Growth and Size of the Brazilian Mutual Fund Industry

This article describes the evolution of the Brazilian mutual fund industry, its regulatory framework, organization, types of investors and managers, economic environment and its relative growth. It shows the evolution of this industry in Brazil and its idiosyncrasies providing a deeper look into one of the largest emerging market mutual fund industries. It emphasizes the growth of independent managers with more complex assets and sophisticated strategies that resemble international hedge funds. There are many popular and academic explanations for the mutual funds growth, some of which were tested in this article using a time series framework. The results suggest that financial market innovation and market risk are significant variables in explaining growth. Common variables like economic growth, regulation and taxes were not found to be statistically significant. We conclude with a comparison between the evolution of the Brazilian and US mutual fund industries.

Comparison Between the Indian and US Mutual Fund Industry

Establishing realistic financial goals is the first essential step towards successful investing. Understanding the kind of investment best suited to an individual to help one achieve his goal is even more important. Financial Planning cultivates a positive attitude towards saving and investment. A mutual fund provides an option of investing without any major complexities. In order to understand the logic behind the huge returns, which an investor gets, we need to understand the performance parameters, which lead to these returns. The main objective of the study is to evaluate the performance of mutual funds of USA and India. And this evaluation can be done on the basis of parameters like NAV, AUM, Beta, Standard deviation, Sharpe ratio, P/E Ratio, P/B Ratio, Portfolio Turnover, R-Squared, Alpha and Expense Ratio. The research also intends to bring in the new trends in the mutual fund industry and to give a futuristic insight to it. The study is based on primary and descriptive research. As primary research is the true representative of the investors’ opinion and it involves the collection of data that does not already exist. Descriptive research provides insights into and comprehension of an issue or situation with answers to questions such as who, what, where, when and how. For analysis, four categories of funds have been used, which are Balanced funds, Large Cap funds, Index funds and Tax funds of both the countries and these funds are compared. In each type of category, five different schemes have been selected and then compared with each other in order to know which country’s funds performance is better. As a part of our primary research, a sample of 50 investors was taken each of US and India. Questionnaire consisting of 12 questions pertaining to mutual funds were used to study the performance of various schemes in both the countries. This study gives only a brief idea as to how mutual funds in both the countries are performing; an attempt has been made to represent mutual fund industry of both the countries by taking a few top and best performing companies in each of the country. Research analysis showed there has been an increase in the amount of business that mutual funds are getting in India and it is quite significant. US mutual fund industry accounts to 51% of the total worldwide share; due to its enormous size it is obvious that it is way ahead of India. When it comes to growth rate, Indian mutual fund industry comes in one of the rapidly growing industries. Many new foreign AMCs are now coming to Indian market.

The Growth and Size of the Brazilian Mutual Fund Industry

This article describes the evolution of the Brazilian mutual fund industry, its regulatory framework, organization, types of investors and managers, economic environment and its relative growth. It shows the evolution of this industry in Brazil and its idiosyncrasies providing a deeper look into one of the largest emerging market mutual fund industries. It emphasizes the growth of independent managers with more complex assets and sophisticated strategies that resemble international hedge funds. There are many popular and academic explanations for the mutual funds growth, some of which were tested in this article using a time series framework. The results suggest that financial market innovation and market risk are significant variables in explaining growth. Common variables like economic growth, regulation and taxes were not found to be statistically significant. We conclude with a comparison between the evolution of the Brazilian and US mutual fund industries.

Do Mutual Fund Managers Have Asset Management Skills? Evidence from New Measures on Crisis Management and Directional Trading

We develop a directional trading model and a crisis management model to measure fund manager skills more adequately. We test the robustness of both traditional market timing models and new management skill models to changes in their underlying investor utility function and excess return definition. We apply our theoretical findings to an empirical setting in that we test 131 US mutual funds for management skills over the past 24 years. Firstly, we find argumentative evidence that fund managers may add investor value by correctly predicting times of high volatility and financial crises, and adjusting their portfolio’s risk exposure accordingly. Secondly, based on simulated fund returns of perfect market timers, imperfect market timers, and inconsistent market timers, we find return timing models to be relatively unrobust to changes in utility assumptions and robust to changes in the underlying excess return definition. Thirdly, empirically, we find positive market timing skills in maximum capital gains funds and growth funds for our first sub-period (1985-1995). These results are robust to potential misspecification. Likewise, the evidence of positive (negative) directional trading skills that we find for the first (second) sub-period is robust to misspecification. Finally, we find that fund managers reveal positive crisis management skills during the second sub-period (1996-2008).

On the Role of Risk in the Morningstar Rating for Mutual Funds

In the mutual funds industry the rating process is very important, and Morningstar is surely the most influential international rating agency. In this work we consider the problem of evaluating if the risk component is adequately accounted for in the Morningstar rating. To face this problem we compare the ratings produced giving different weights to the risk component. The focus of the analysis is on testing the hypothesis that two similar rating procedures with different risk parameters (or, in statistical terms, two raters) are equivalent. To that end, first the notion of beta-equivalence is introduced and then a Monte Carlo test for the hypothesis of beta-equivalence is described. Finally, to answer the question on the role of risk in the Morningstar rating, we analyze 1763 monthly return time series of US mutual funds. Results show that the current Morningstar classification, based on a risk-adjusted measure, only marginally accounts for risk and that if we want that risk really matters, the risk parameter should be increased.

Yes, the Choice of Performance Measure Does Matter for Ranking of US Mutual Funds

Recent literature in performance evaluation has focused on preferences and characteristics of returns’ distribution that go beyond mean and variance world. However, Eling (2008) compared the Sharpe ratio with some of these performance measures, and found virtually identical rank ordering using mutual fund data. This paper compares 13 performance measures with the traditional Sharpe Ratio using a sample of US Fixed-Income, Equity and Asset Allocation Mutual Funds. Results show that performance measures based on absolute reward-risk ratios have similar rankings, when the numerator (mean excess return) is the same. However, when we move to other types of performances measures, results may be significantly different. This is the case of the MPPM (Manipulation-proof Performance Measure), Upside Potential Ratio, Appraisal Ratio. Results are especially different for the MPPM. Robustness checks show that some of the performance measures are very sensitive to parameters’ changes. Therefore, the choice of the performance measure is actually important for mutual fund ranking and selection.

The Effects of the Organizational Structure On Asset Management

We study how the strategies and performance of an asset management company are affected by its internal organizational structure. Relying on Stein's (2002) theory of organizations, we argue that a more hierarchical structure reduces the incentives to collect soft information and to engage in proximity investment. This should lower portfolio concentration, increase managerial herding and reduce performance. We use information on the organizational structure of all the US mutual funds and insurance-managed funds investing in US corporate bonds. We show that more hierarchical structures invest less in firms located close to them and deliver lower performance. An additional layer in the hierarchical structure reduces the average performance by 24 basis points per month. At the same time, more hierarchical structures tend to herd more and to hold less concentrated portfolios. We also find that changes in fund structure quickly find their way into the behavior of fund managers. Overall, the organizational structure affects performance slightly more for mutual funds than insurance-managed funds, while it impacts proximity investment, herding and portfolio concentration more for insurance-managed funds than mutual funds.

The Effects of the Organizational Structure on Asset Management

We study how the strategies and performance of an asset management company are affected by its internal organizational structure. Relying on Stein's (2002) theory of organizations, we argue that a more hierarchical structure reduces the incentives to collect soft information and to engage in proximity investment. This should lower portfolio concentration, increase managerial herding and reduce performance. We use information on the organizational structure of all the US mutual funds and insurance-managed funds investing in US corporate bonds. We show that more hierarchical structures invest less in firms located close to them and deliver lower performance. An additional layer in the hierarchical structure reduces the average performance by 24 basis points per month. At the same time, more hierarchical structures tend to herd more and to hold less concentrated portfolios. We also find that changes in fund structure quickly find their way into the behavior of fund managers. Overall, the organizational structure affects performance slightly more for mutual funds than insurance-managed funds, while it impacts proximity investment, herding and portfolio concentration more for insurance-managed funds than mutual funds.

A Star is Born: A New International Investment Style for US Mutual Funds

We provide evidence that a new mutual fund 'international growth' investment style is born between 1986 and 1995. This corresponds to a large increase in the number of equity international growth funds during this period and a greater appetite amongst investors for international investments.

On understanding mutual fund terminations

We examine the determinants of US mutual fund terminations and provide estimates of mutual fund hazard functions. We find that mutual fund termination correlates with a variety of fund specific variables as well as with market variables such as the S&P 500 index and the short-term interest rate. We also test the underlying assumptions of the semi-parametric Cox model and reject proportionality, thus calling to question the use of this model in forming estimates of mutual fund hazard functions. We find that different fund categories exhibit distinct hazard functions depending on the fund’s investment objectives.