Performance Persistence of Dutch Pension Funds

This paper studies the investment performance of pension funds with a focus on their ability in implementing their intended investment strategy. We use a sample of Dutch industry-wide pension funds, which are obliged by law to report their investment performance according to the so-called z-score. The z-score is a risk-adjusted performance measure with benchmark settings predefined by Dutch law. We find that pension funds as a group cannot beat their self-selected benchmarks consistently. Applying a cross-sectional portfolio approach we find evidence that the largest pension funds outperform the smallest funds

Investment Manager Characteristics, Strategy and Fund Performance.

This dissertation presents five research essays evaluating the performance of managed funds in light of the investment strategy and manager characteristics exhibited by institutional investment companies. An analysis of investment performance with respect to a fund managers strategy provides important information in determining whether performance objectives have been achieved. There are a number of different types of investment strategies managed funds may adopt. However, the primary dichotomy is on the basis of whether the portfolio manager implements either an active or index approach. Active managers attempt to outperform the market through the use of price-sensitive information, whereas a passive manager's objective is to replicate the returns and risk of a target benchmark index. The evaluation of investment manager characteristics is also evaluated. This is motivated on the basis that asset management entities place significant emphasis on both the articulation and differentiation of their investment style relative to competitors, and selling the strengths of their portfolio management skills (in terms of past performance) as well identifying the key individuals comprising their investment team and their unique attributes. For active equity managers, the methods used in constructing portfolios and implementing the investment strategy include security selection, in terms of 'top-down' or 'bottom-up' strategies, value-biased, growth-biased or style-neutral strategies, and portfolios exhibiting market capitalisation biases (i.e. preferences to large or small-cap securities). In terms of active bond portfolio management, the most common strategies include duration management and yield curve positioning. Active managers' strategies are likely to extend beyond stock selection, in particular, where the fund manager adjusts the portfolio's composition in anticipation of favourably capitalising on future movements in the market. For index managers, replication of both the returns and risk of the underlying index may be achieved through either full-replication of constituent stocks comprising the index, or through non-replication techniques (stratified sampling and/or optimisation). Each essay provides a unique contribution to the literature with respect to the performance of active and index funds, as well as an analysis of funds that invest specifically in domestic equities, domestic fixed interest, and diversified funds that invest across the broad spectrum of asset classes. The origins of the performance evaluation literature are ascribed to Cowles' (1933) pioneering work, and the literature has given increasing attention to the topic. However the most fundamental issue considered in almost all previous studies of managed fund performance is the extent to which actively managed portfolios have earned superior risk-adjusted excess returns for investors. The literature has overwhelmingly documented (with a small number of exceptions) that active funds have been unable to earn superior returns, either before or after expenses (e.g. Jensen (1968), Elton et al. (1993), Malkiel (1995), Gruber (1996)). While the international evidence is supported by the few Australian managed fund studies available, Australian research remains surprisingly scarce. This is perplexing considering the sheer size of the investment industry in Australia (around $A717 billion as at 30 June 2001) and the importance placed on the sector with respect to successive Federal Governments' retirement income policies. The objectives of this dissertation therefore involve an analysis of managed fund performance with respect to differences in investment strategies (i.e. active and index), as well as providing an analysis of funds invested in equities, bonds and diversified asset classes (or multi-sector portfolios). The first essay evaluates the market timing and security selection capabilities of Australian pooled superannuation funds. These funds provide institutional investors with exposure to securities across many different asset classes, including domestic and international equities, domestic and international fixed interest, property and cash. Surprisingly, the specific analysis of multi-sector funds is scarce in the literature and limited to Brinson et al. (1986, 1991), Sinclair (1990), and Blake et al. (1999). This essay also evaluates performance for the three largest asset classes within diversified superannuation funds and their contribution to overall portfolio return. The importance of an accurately specified market portfolio proxy in the measurement of investment performance is demonstrated, where the essay employs performance benchmarks that account for the multi-sector investment decisions of active investment managers in a manner that is consistent with their unique investment strategy. This approach rectifies Sinclair's (1990) analysis resulting from benchmark misspecification. Consistent with the literature, the empirical results indicate that Australian pooled superannuation funds do not exhibit significantly positive security selection or market timing skill. Given the evidence in the literature surrounding the inability of active funds to deliver superior returns to investors, lower cost index funds have become increasingly popular as an alternative investment strategy. Despite the significant growth in index funds since 1976, when the first index mutual fund was launched in the U.S., research on their performance is sparse in the U.S. and non-existent in Australia. The second essay provides an original analysis of the Australian index fund market, with specific analysis applicable to institutional Australian equity index funds offered by fund managers. While indexing is theoretically straightforward, in practice there exist potential difficulties in exactly matching the return of the underlying index. Therefore the magnitude of tracking error is likely to be of concern to investors. This essay documents the existence of significant tracking error for Australian index funds, where the magnitude of the difference between index fund returns and index returns averages between 7.4 and 22.3 basis points per month for funds operating at least five years. However, there is little evidence of bias in tracking error, implying that these funds neither systematically outperform or underperform their benchmark on a before cost basis. Further analysis documents that the magnitude of tracking error is related to fund cash flows, market volatility, transaction costs and index replication strategies used by passive investment managers. The third essay presents evidence of the performance of U.S. mutual funds, where attention is given to both active and index mutual funds for which the applicable benchmark index is the S&P 500. This essay examines both the magnitude and variation of tracking error over time for S&P 500 index mutual funds. The essay documents seasonality in S&P 500 index mutual fund tracking error, where tracking error is significantly higher in the months of January and May, together with a seasonal trough in the quarters ending March-June-September-December. Statistical evidence indicates tracking error is both positively and significantly correlated with the dividend payments arising from constituent S&P 500 securities. In terms of a performance comparison between actively managed and index funds, active funds on average are found to significantly underperform passive benchmarks. On the other hand, S&P 500 index mutual funds earned higher risk-adjusted excess returns after expenses than large capitalisation-oriented active mutual funds in the period examined. These results suggest the S&P 500 is consistent with capital market efficiency, implying an absence of economic benefit accruing to the average investor utilising actively managed U.S. equity mutual funds. The fourth essay presented in the dissertation examines the performance of Australian investment management organisations with direct reference to their specific characteristics and strategies employed. Using a unique information source, performance is evaluated for actively managed institutional balanced funds (or diversified asset class funds), Australian share funds and Australian bond funds. Performance is evaluated with respect to the investment strategy adopted, the experience and qualifications held by investment professionals, and the tenure of the key investment professionals. This essay also evaluates the performance of senior sector heads to determine the skills of individuals driving the investment process, even though these individuals may migrate to competitor organisations. The essay finds evidence that a significant number of active Australian equity managers earned superior risk-adjusted returns in the period, however active managers perform in line with market indices for balanced funds and Australian bond funds. A number of manager characteristics are also found to predict risk-adjusted excess returns, systematic risk and investment expenses. Of particular note, performance of balanced funds is negatively related to the institution's age and the loyalty of non-senior investment staff. Performance is also found to be significantly higher for managers that predominantly operate their portfolios using a bottom-up, stock selection approach. Interestingly, the human capital of managers, measured as the years of tertiary education undertaken, does not explain risk-adjusted excess returns. Systematic risk is positively related to an institutions age and negatively related to both senior manager loyalty and the implementation of bottom-up portfolio management strategies. In terms of management expenses, fees are directly related to the Australian equities benchmark allocation, the years of tertiary education, the number of years service (loyalty) for non-senior investment professionals and the total years experience of senior money managers. This concluding essay also documents that changes in top management have significant performance effects. In the 12-month period after a change in fixed income director or chief investment officer, performance is significantly lower and significantly higher, respectively. There is no significant difference in performance where changes in top management occur for Australian equities. The years of service (loyalty) provided to asset management firms by equities directors is inversely related to risk-adjusted return. The fifth and final essay examines the investment performance of active Australian bond funds and the impact of investor fund flows on portfolio returns. This essay represents a significant and original analysis in terms of its contribution to the literature, given the absence of Australian bond fund performance analytics and also the limited attention provided in the U.S. Both security selection and market timing performance is evaluated using both unconditional models and conditional performance evaluation techniques, which account for public information and the time-variation in risk. Overall, the results of this essay are consistent with the U.S. and international mutual fund evidence, where performance is found to be consistent with an efficient market. While actively managed institutional funds perform broadly in line with the index before expenses, the paper documents significant underperformance for actively managed retail bond funds after fees. The study also documents that retail fund flows negatively impact on market timing coefficients when flow is not accounted for in unconditional models

DO AGRICULTURAL MARKET ADVISORY SERVICES BEAT THE MARKET? EVIDENCE FROM THE CORN AND SOYBEAN MARKETS OVER 1995-1998

The purpose of this paper is to address two basic performance questions for market advisory services: 1) Do market advisory services, on average, outperform an appropriate market benchmark? and 2) Do market advisory services exhibit persistence in their performance from year-to-year? Data on corn and soybean net price received for advisory services, as reported by the AgMAS Project, are available for the 1995, 1996, 1997 and 1998 crop years. Performance test results suggest that, on average, market advisory services exhibit a small ability to "beat the market" for the 1995 through 1998 corn and soybean crops. It is debatable whether the performance of advisory services also is economically significant. The predictability results provide little evidence that future advisory service pricing performance can be predicted from past performance.Marketing,

Revisiting Mutual Fund Performance Evaluation

Mutual fund manager excess performance should be measured relative to their self-reported benchmark rather than the return of a passive portfolio with the same risk characteristics. Ignoring the self-reported benchmark introduces biases in the measurement of stock selection and timing components of excess performance. We revisit baseline empirical evidence in mutual fund performance evaluation utilizing stock selection and timing measures that address these biases. We introduce a new factor exposure based approach for measuring the – static and dynamic – timing capabilities of mutual fund managers. We overall conclude that current studies are likely to be overstating lack of skill because they ignore the managers’ self-reported benchmark in the performance evaluation process.Mutual funds, short-term performance, market timing, factor timing

Giving While Living: The Beldon Fund Spend-Out Story

Provides insight into the challenges, advantages, and practical implications of a limited-life foundation. Offers strategies, advice, and lessons learned on how spending out affects program strategy, staffing, asset management, and grantee relations

THE PRIVATE SECTOR APPROACH TO GRAIN MARKETING: THE CASE OF AGRICULTURAL MARKET ADVISORY SERVICES

The purpose of this paper is to investigate the pricing performance and behavior of market advisory services in corn and soybeans. Data on corn and soybean net price received for advisory services, as reported by the AgMAS Project, are available for the 1995, 1996 and 1997 marketing years. Performance test results suggest that, on average, market advisory services exhibit a small ability to "beat the market". This conclusion is somewhat sensitive to the type of performance test and market benchmark considered. The predictability results provide little evidence that future advisory service pricing performance can be predicted from past performance. Marketing profiles identify three marketing "styles": i) "scale-up" sales, ii) selective hedging and iii) "speculative" hedging. Advisory services tend to follow the same approach across crop years.Agribusiness,

DO AGRICULTURAL MARKET ADVISORY SERVICES BEAT THE MARKET? EVIDENCE FROM THE CORN AND SOYBEAN MARKETS OVER 1995-1997

The purpose of this paper is to address two basic performance questions for market advisory services: 1) Do market advisory services, on average, outperform an appropriate market benchmark? and 2) Do market advisory services exhibit persistence in their performance from year-to-year? Data on corn and soybean net price received for advisory services, as reported by the AgMAS Project, are available for the 1995, 1996 and 1997 marketing years. Performance test results suggest that, on average, market advisory services exhibit a small ability to "beat the market" for the 1995 through 1997 corn and soybean crops. This conclusion is somewhat sensitive to the type of performance test and market benchmark considered. The predictability results provide little evidence that future advisory service pricing performance can be predicted from past performance. When services are grouped by performance quantile, some evidence of predictability is found for the poorest performing services, but not for top performing services.Marketing,

A Comparative Study of Venture Capital Performance in the US and Europe

For the past fifty years in the United States, venture capital (VC) has provided initial funding to innovative entrepreneurial enterprises, while the European venture capital industry has only really emerged over the past decade. Using quarterly data from 1993 to 2003, this paper examines and compares the return and risk performance of venture capital funds in US and Europe. Several results are noteworthy. First, pooled venture capital returns in US and Europe are 3.273% and 0.765% (on a quarterly basis) above the CAPM market risk-adjusted returns, respectively. Second, US venture capital fund performance dominates that of Europe in all measures: mean return, total-risk adjusted return, and market-risk adjusted return. Third, the linkage between US VC fund performance and the US stock market is much stronger than the co-movement between the European VC and European stock market. Finally, the introduction of Euro.NM in 1997 has substantially enhanced the relationship between the venture capital and stock market performance in Europe

Time-varying skills (versus luck) in U.S. active mutual funds and hedge funds

In this paper, we develop a nonparametric methodology for estimating and testing time-varying fund alphas and betas as well as their long-run counterparts (i.e., their time-series averages). Traditional linear factor model arises as a special case without time variation in coefficients. Monte Carlo simulation evidence suggests that our methodology performs well in finite samples. Applying our methodology to U.S. mutual funds and hedge funds, we find most fund alphas decrease with time. Combining our methodology with the bootstrap method which controls for ‘luck’, positive long-run alphas of mutual funds but hedge funds disappear, while negative long-run alphas of both mutual and hedge funds remain. We further check the robustness of our results by altering benchmarks, fund skill indicators and samples

THE PRICING PERFORMANCE OF MARKET ADVISORY SERVICES IN CORN AND SOYBEANS OVER 1995-2000

The purpose of this research report is to evaluate the pricing performance of market advisory services for the 1995-2000 corn and soybean crops. Certain explicit assumptions are made to produce a consistent and comparable set of results across the different advisory programs. These assumptions are intended to accurately depict "real-world" marketing conditions. Several key assumptions are: i) with a few exceptions, the marketing window for a crop year runs from September before harvest through August after harvest, ii) cash prices and yields refer to a central Illinois farm, iii) storage is assumed to occur at on-farm or commercial sites, and iv) marketing loan recommendations made by advisory programs are followed wherever feasible. Based on these assumptions, the net price received by a subscriber to market advisory programs is calculated for the 1995-2000 corn and soybean crops. Market and farmer benchmarks are developed for the performance evaluations. Two market benchmarks are specified in order to test the fragility of performance results to changing benchmark assumptions. The 24-month market benchmark averages market prices for the entire 24-month marketing window. The 20-month market benchmark is computed in a similar fashion, except the first four months of the marketing window are omitted. The farmer benchmark is based upon the USDA average price received series for corn and soybeans in Illinois. The same assumptions applied to advisory program track records are used when computing the market and farmer benchmarks. Four basic indicators of performance are applied to advisory program prices and revenues over 1995-2000. The results provide limited evidence that advisory programs as a group outperform market benchmarks, particularly after considering risk. In contrast, substantial evidence exists that advisory programs as a group outperform the farmer benchmarks, even after taking risk into account. Whether the superior performance of advisory programs versus the farmer benchmark is attributed to luck or skill depends on one's theoretical perspective. Efficient market theory favors a luck interpretation, while behavioral market theory favors a skill interpretation. Regardless of the theoretical perspective, there is little evidence that advisory programs with superior performance can be usefully selected based on past performance.Marketing,