Mutual fund performance: Measurement and evidence

The paper provides a critical review of empirical findings on the performance of mutual funds, mainly for the US and UK. Ex-post, there are around 0-5% of top performing UK and US equity mutual funds with truly positive-alpha performance (after fees) and around 20% of funds that have truly poor alpha performance, with about 75% of active funds which are effectively zero-alpha funds. Key drivers of relative performance are, load fees, expenses and turnover. There is little evidence of successful market timing. Evidence suggests past winner funds persist, when rebalancing is frequent (i.e., less than one year) and when using sophisticated sorting rules (e.g., Bayesian approaches) - but transactions costs (load and advisory fees) imply that economic gains to investors from winner funds may be marginal. The US evidence clearly supports the view that past loser funds remain losers. Broadly speaking results for bond mutual funds are similar to those for equity funds. Sensible advice for most investors would be to hold low cost index funds and avoid holding past 'active' loser funds. Only sophisticated investors should pursue an active ex-ante investment strategy of trying to pick winners - and then with much caution. © 2010 New York University Salomon Center and Wiley Periodicals, Inc

Investors Do Respond to Poor Mutual Fund Performance: Evidence from Inflows and Outflows

Abstract We examine the relation between mutual fund performance and gross flows for a large sample of actively managed U.S. mutual funds. Unlike previous studies that have only examined periods of generally increasing net flows, our sample includes periods of both increasing and decreasing net flows. We find that outflows are related to performance, with investors withdrawing money from poor performers. We also find that outflows and inflows respond asymmetrically to performance, outflows increase more aggressively following poor performance, and inflows increase more aggressively following good performance. Additionally, we find a symmetric performance net flow relation

Excess Corporate Cash and Mutual Fund Performance

Corporations may experience lower earnings on assets due to the underinvestment of excess cash. Specifically, leaders of nonfinancial firms hold small amounts of cash in mutual fund investments. The primary benefit to understanding mutual funds is the potential to use them to manage excess corporate cash. Using the efficient market hypothesis as a framework for the study, the purpose of this correlational study was to examine the relationship among mutual fund expenses including 12b-1 fees, sales load at purchase, management fees, total capitalization, and performance. Secondary research databases were used, including the Steele Mutual Fund Expert and the U.S. Securities and Exchange Commission, to create a sample of 96 actively managed mutual funds for the years 2010 to 2014. Multiple regression analysis revealed that 12b-1 fees, sales load at purchase, management fees, and total capitalization were not significant predictors of mutual fund performance. Further, in most years, actively managed mutual funds were not able to outpace the benchmark index. However, a small cluster of successful mutual funds (30) exceeded the performance of the S&P 500 by 5.99%. The implications for positive social change include the potential to devise a strategy to invest excess cash, as additional earnings could offset increasing operational costs and ease shareholder concern. Additionally, legislators could use the results of this study to create regulations to promote stable financial markets

TEST OF RANDOM WALK ON SELECTED STOCK MARKETS IN AFRICA

This study investigated the efficiency market theory in four (4) selected African stock markets (Nigeria, South Africa, Kenya and Morocco) proxied by their All-share indices from the perspective of random walk hypothesis using the variance ratio tests. Daily market returns data from 01/02/2012 to 26/03/2020 obtained from the individual national stock markets via their official websites was employed. The findings of the study evince that over the study period, the daily returns movement on Nigeria stock exchange All-share index is affected by historical price information; hence, Nigeria stock market follows the random walk pattern whereas the daily returns movement on South Africa FTSE-JSE stock exchange index, Kenya (Nairobi) stock exchange index and Morocco (Casablanca) stock exchange index are not affected by historical price information; hence, South Africa, Kenya and Morocco stock markets do not follow the random walk pattern. We therefore conclude that African stock markets are largely inefficient; hence, they are characterized by market anomalies and momentum effects implying that financial resources are not efficiently and effectively mobilized. Also, there is lack of evidence of weak form efficiency in African markets which also implies the existence of arbitrage opportunities which would lead to abnormal returns or profits if well exploited. From the findings of this study, we recommend amongst others that there is need for investors and traders in the African stock markets to exploit the existing arbitrage opportunities that are created by market anomalies in order to possibly beat the stock markets and earn abnormal returns. This can be achieved by using market trading strategies that are consistent with technical analysis such as day-of-the week momentum strategy

The Efficient Market Hypothesis and Its Critics

Revolutions often spawn counterrevolutions and the efficient market hypothesis in finance is no exception. The intellectual dominance of the efficient-market revolution has more been challenged by economists who stress psychological and behavioral elements of stock-price determination and by econometricians who argue that stock returns are, to a considerable extent, predictable. This survey examines the attacks on the efficient-market hypothesis and the relationship between predictability and efficiency. I conclude that our stock markets are more efficient and less predictable than many recent academic papers would have us believe.

The customer is king : mutual fund relationships and analyst recommendations

I investigate whether the business relations between mutual funds and brokerage firms influence sell-side analyst coverage and recommendations. Using a comprehensive sample of analyst recommendations in China over the 2004-2008 period, I find that the likelihood of analyst coverage and analysts’ relative recommendations, benchmarked against consensus recommendations, are positively associated with the mutual fund business relationship. I measure the business relation by the weight of a stock in the mutual fund client’s portfolio and the commission revenue generated from the mutual fund clients. My results show that mutual funds take advantage of these optimistic recommendations by selling the stocks. I also find evidence that analysts employed in politically connected brokerage firms inflate their recommendations on state-controlled listed enterprises. Lastly, I examine the short-term and long-term investment returns from a strategy that follows the analyst recommendations. In the short-term, I find positive stock returns, which benefit the client mutual funds. However, I also find evidence that investors recognize the conflict of interest and caps the stock price increases. In the longer-term, the strong buy and buy recommendations yield zero or negative stock returns

Agnostic fundamental analysis works

To assess stock market informational efficiency with minimal data snooping, we take the view of a statistician with little knowledge of finance. The statistician uses techniques such as least squares to estimate peer-implied fair values from the market values of replicating portfolios with the same accounting statements as the company being valued. Divergence of a company's peer-implied value estimate from its market value represents mispricing, motivating a convergence trade that earns risk-adjusted returns of up to 10% per year and is economically significant for both large and small cap firms. The rate of convergence decays to zero over the subsequent 34 months

Kill Cammer: Securities Litigation Without Junk Science

Securities litigation is a hotbed of junk science concerning market efficiency. This Article explains why and suggests a way out. In its 1988 decision in Basic v. Levinson, the Supreme Court endorsed the fraud on the market presumption for securities traded in an efficient market. Faced with the task of determining market efficiency, courts throughout the nation embraced the ad hoc speculations of a first-mover district court that proclaimed, in Cammer v. Bloom, how to allege (and presumably prove) facts that would do just that. The Cammer court’s analysis did not rely on financial economics for its notions, but instead regurgitated the assertions of a single plaintiff’s expert affidavit—from a securities law professor, not a financial economist—and a securities law treatise equally uninformed by the relevant field. The result has been thirty years of junk science in securities adjudication. This Article traces the development of the fraud on the market theory from its pre-efficient-markets-hypothesis roots through a brief “gilding the lily” phase where an appeal to social science results on market efficiency was only an ancillary, bolstering argument for already-sufficient precedent for the fraud on the market presumption, to the requirement that litigants plead and prove efficiency using indicia with no support in financial economics. The way out of this embarrassing state of affairs is to return to the roots of fraud on the market in the non-technical notion of “a free and open public market” that inquires only whether the market for the security at issue is open to active buyers and sellers and is not subject to substantial seller lockups or bans on short selling. It is reasonable to presume that prices in such free and open public markets can be distorted by fraud, a presumption that is then rebuttable by establishing (1) that the alleged fraud in fact had no price impact; (2) that there are substantial limits on the ability of active investors to buy and sell in the market, such that the market is not a “free and open public” one; or (3) that the plaintiff would have made their purchase or sale at the affected price even knowing of the falsity of the alleged misrepresentation. This formulation is consistent with all controlling Supreme Court opinions