A review of behavioural and management effects in mutual fund performance

This paper surveys and critically evaluates the literature on the role of management effects and fund characteristics in mutual fund performance. First, a brief overview of performance measures is provided. Second, empirical findings on the predictive power of fund characteristics in explaining future returns are discussed. Third, the paper reviews the literature on fund manager behavioural biases and the impact these have on risk taking and returns. Finally, the impact of organizational structure, governance and strategy on both fund risk taking and future performance is examined. While a number of surveys on mutual fund performance are available, these have not focused on the role of manager behavioural biases, manager characteristics and fund management strategic behavior on fund performance and risk taking. This review is an attempt to fill this gap. Empirical results indicate that finding successful funds ex-ante is extremely difficult, if not impossible. In contrast, there is strong evidence that poor performance persists for many of the prior "loser fractile" portfolios of funds. A number of manager behavioural biases are prevalent in the mutual fund industry and they generally detract from returns

Market and Style Timing: German Equity and Bond Funds

We apply parametric and non-parametric estimates to test market and style timing ability of individual German equity and bond mutual funds using a sample of over 500 equity and 350 bond funds, over the period 1990-2009. For equity funds, both approaches indicate no successful market timers in the 1990-1999 or 2000-2009 periods, but in 2000-2009 the non-parametric approach gives fewer unsuccessful market timers than the parametric approach. There is evidence of successful style timing using the parametric approach, and unsuccessful style timing, particularly in the 2000-2009 period. There is evidence of positive and negative bond timing in the 2000-09 period

False Discoveries: Winners and Losers in Mutual Fund Performance

We use a multiple hypothesis testing framework to estimate the false discovery rate (FDR) amongst UK equity mutual funds. For all funds, we find a relatively high FDR for the best funds of 67% (at a 10% significance level), which indicates that only around 2% of all funds truly outperform their benchmarks. For the worst funds the FDR (at a 10% significance level), is relatively small at 15.9% which results in 20% of funds which truly underperform their benchmarks. For different investment styles, this pattern of very few genuine winner funds is repeated for all companies, small companies and equity income funds. However, forming portfolios of funds based on a set of funds for which the FDR is relatively low, produces positive alphas

The Market Timing Ability of UK Equity Mutual Funds

We apply a recent nonparametric methodology to test the market timing skills of UK equity mutual funds. The methodology has a number of advantages over the widely used regression based tests of Treynor-Mazuy (1966) and Henriksson-Merton (1981). We find a relatively small number of funds (around 1.5%) demonstrate positive market timing ability at a 5% significance level, while around 10-20% of funds exhibit negative (perverse) timing and most funds do not time the market. Our findings indicate that the few skillful market timers possess private market timing signals so their performance cannot be attributed to publicly available information. In terms of fund classifications, there are a small number of successful positive market timers amongst equity income and general equity funds, while a few small company funds time a small company rather than a broad market index. We also apply regression based tests of volatility timing and find evidence that a slightly larger (around 5%) of funds successful time market volatility

What Does Rebalancing Really Achieve?

There is now a substantial literature on the effects of rebalancing on portfolio performance. However, this literature contains frequent misattribution between ‘rebalancing returns’ which are specific to the act of rebalancing, and ‘diversification returns’ which can be earned by both rebalanced and unrebalanced strategies. Confusion on this issue can encourage investors to follow strategies which involve insufficient diversification and excessive transactions costs. This paper identifies the misleading claims that are made for rebalanced strategies and demonstrates theoretically and by simulation that the apparent advantages of rebalanced strategies over infinite horizons give an inaccurate impression of their performance over finite horizons

UK mutual funds: performance persistence and portfolio size

We re-examine performance persistence amongst UK mutual funds. Specifically, we investigate performance persistence amongst small portfolios of past high-performing funds. In contrast to the more common analysis of decile portfolios of funds, we focus on persistence in the more extreme positive tail of the cross section of fund performance. This paper contributes to the smaller literature on UK rather than US mutual fund performance. We investigate fund persistence based on practitioner index models as well as academic factor models, focusing on small portfolios of funds using inference based on nonparametric persistence test statistics as well as conventional t tests. We provide strong evidence of positive persistence amongst small-size portfolios of (past) high-performing funds that is robust to alternative formation and holding periods and alternative performance models. We also document some sensitivity in inferences on positive persistence when using nonparametric versus conventional tests

Winners and losers: German equity mutual funds

We investigate the performance of winners and losers for German equity mutual funds (1990–2009), using empirical order statistics. When using gross returns and the Fama–French three-factor model, the number of statistically significant positive alpha funds is zero but increases markedly when market timing variables are added. However, when using a ‘total performance’ measure (which incorporates both alpha and the contribution of market timing), the number of statistically significant winner funds falls to zero. The latter is consistent with the bias in estimated alphas in the presence of market timing. We also find that many poorly performing funds are unskilled rather than unlucky

Performance and performance persistence of UK closed-end equity funds

Using a comprehensive data set of almost 300 UK closed-end equity funds over the period 1990 to 2013, we use the false discovery rate to assess the alpha-performance of individual funds with both domestic and other mandates, using self-declared benchmarks and additional risk factors. We find evidence to indicate that up to 16% of the funds have truly positive alphas while around 3% have truly negative alphas. Positive post-formation alphas using fund-price returns depend on the factor model used: there is some positive-alpha performance when post-formation returns are evaluated using a one-factor global model but substantial positive-alpha performance when using a four-factor global model

Increased Immunosignals of Collagen IV and Fibronectin Indicate Ischemic Consequences for the Neurovascular Matrix Adhesion Zone in Various Animal Models and Human Stroke Tissue

Ischemic stroke causes cellular alterations in the "neurovascular unit" (NVU) comprising neurons, glia, and the vasculature, and affects the blood-brain barrier (BBB) with adjacent extracellular matrix (ECM). Limited data are available for the zone between the NVU and ECM that has not yet considered for neuroprotective approaches. This study describes ischemia-induced alterations for two main components of the neurovascular matrix adhesion zone (NMZ), i.e., collagen IV as basement membrane constituent and fibronectin as crucial part of the ECM, in conjunction with traditional NVU elements. For spatio-temporal characterization of these structures, multiple immunofluorescence labeling was applied to tissues affected by focal cerebral ischemia using a filament-based model in mice (4, 24, and 72 h of ischemia), a thromboembolic model in rats (24 h of ischemia), a coagulation-based model in sheep (2 weeks of ischemia), and human autoptic stroke tissue (3 weeks of ischemia). An increased fibronectin immunofluorescence signal demarcated ischemia-affected areas in mice, along with an increased collagen IV signal and BBB impairment indicated by serum albumin extravasation. Quantifications revealed a region-specific pattern with highest collagen IV and fibronectin intensities in most severely affected neocortical areas, followed by a gradual decline toward the border zone and non-affected regions. Comparing 4 and 24 h of ischemia, the subcortical fibronectin signal increased significantly over time, whereas neocortical areas displayed only a gradual increase. Qualitative analyses confirmed increased fibronectin and collagen IV signals in ischemic areas from all tissues and time points investigated. While the increased collagen IV signal was restricted to vessels, fibronectin appeared diffusely arranged in the parenchyma with focal accumulations associated to the vasculature. Integrin alpha(5) appeared enriched in the vicinity of fibronectin and vascular elements, while most of the non-vascular NVU elements showed complementary staining patterns referring to fibronectin. This spatio-temporal characterization of ischemia-related alterations of collagen IV and fibronectin in various stroke models and human autoptic tissue shows that ischemic consequences are not limited to traditional NVU components and the ECM, but also involve the NMZ. Future research should explore more components and the pathophysiological properties of the NMZ as a possible target for novel neuroprotective approaches