Investment and profitability factors in mutual fund performance evaluation: a conditional approach

This paper provides new evidence on the appropriateness of the Fama-French (2015) five-factor model to evaluate international equity funds’ performance. After extending this model to a conditional framework by allowing for time-varying risk and performance, the results show that funds underperformed during the 2000-2017 period. Funds investing globally and in Europe tend to invest in aggressive firms, but only the latter are exposed to firms with weak profitability. We thus conclude that although both investment and profitability factors are significant in explaining fund returns, the investment factor plays a more relevant role irrespective of the funds’ geographical area of investment.Fundação para a Ciência e Tecnologi

Sobre a avaliação da performance de fundos de investimento

Instituto Superior de Economia e GestãoA avaliação da performance dos gestores de carteiras tem sido uma questão amplamente debatida na literatura financeira. O desenvolvimento da Moderna Teoria do Mercado de Capitais proporcionou o surgimento, nos anos 60, de medidas de avaliação ajustadas ao risco: as de Jensen, Treynor e Sharpe, também denominadas medidas tradicionais de avaliação da performance. As críticas de que têm sido alvo têm a ver, por um lado, com problemas conceptuais e econométricos que lhes estão associados, e por outro, com a impossibilidade destas medidas detectarem as componentes timing e selectividade que contribuem para a performance global. Neste contexto, e após a revisão da literatura, na qual se identificam, comparam e criticamente se discutem as principais escolas de pensamento na área da avaliação da performance de carteiras, procede-se a uma análise empírica, na base de uma amostra de fundos de investimento portugueses, no sentido de (1) se estimarem as medidas tradicionais de avaliação da performance, tendo em consideração vários cenários (diferentes horizontes temporais, diferentes índices de mercado e a possibilidade de heteroscedasticidade) e assim chamar a atenção para algumas questões ao nível da sua aplicação e (2) se aplicar, dadas as limitações das abordagens tradicionais, o modelo proposto por PFLEEDERER e BHATTACHARYA [1983] de forma a obter medidas individuais de timing e selectividade. Os resultados da análise sugerem que os fundos não evidenciam capacidades quer ao nível da selectividade quer de timing. Algumas possíveis explicações para estes resultados são adiantadas, nomeadamente ao nível da utilização dos "benchmarks", existência de elevados custos de transacção, restrições de ordem legal e, eventualmente incapacidade de previsão por parte dos próprios gestores. No entanto, e em face de recentes desenvolvimentos nesta área, sugere-se também que outras razões (inclusivé, a nível teórico), poderão ajudar a compreender estes mesmos resultados, por exemplo, a não consideração da composição das carteiras e de modelos condicionados. ivPortfolio performance evaluatíon has received considerable attention in the past decades. Modem Capital Market Theory led to the development of risk-adjusted measures for ranking investment performance: the so called traditional measures of portfolio peformance of Jensen, Treynor and Sharpe. However, they have been subject to a continuous debate, mainly related either to conceptual and econometric problems, either to the impossibility of these measures in detecting timing and selectivity abilities of investment managers. In such a context, and after reviewing the literature, where the main schools of thoughts are identifíed, compared and critically evaluated, an empirical analysis is carried out, on the basis of a sample of Portuguese investment funds, in order to (1) estimate the above mentioned traditional measures, taking into account various scenarios (different time horizons, different market indexes and the possibility of heteroscedasticity), this way calling the attention to some relevam issues still being debated and (2) to apply, given the limitation of the traditional methodologies, the model suggested by PFLEIDERER and BHATTACHARYA [1983] in order to obtain separate measures of timing and selectivity. The results suggest that the funds do not show any ability in terms of either selectivity or timing. Some possible explanations for these results are advanced, namely in relation to the benchmark chosen, the existence of high transaction costs, constraints at the fiscal levei and, eventually, nonexistent forecasting ability at both leveis from the investment managers. However, in the light of very recent developments in this area, other kind of reasons (inclusive, at the theoretical levei) may help to understand such results, for example, the fact that the portfolio composition as well as conditional models are not being considered vN/

Avaliação do desempenho de fundos de investimento: aplicação do modelo de Henriksson e Merton e sua extensão à Arbitrage Pricing Theory

Neste artigo, é aplicado o modelo de Henriksson e Merton (1981) na versão base, bem como no contexto da Arbitrage Pricing Theory, com o objectivo de avaliar o desempenho de fundos de investimento mobiliário portugueses (nacionais, União Europeia e internacionais) nas vertentes de selectividade e timing. Os resultados obtidos com as duas versões são similares e sugerem que os gestores de fundos não possuem capacidades de selectividade e timing, havendo mesmo alguma evidência de timing negativo. Em ambas as versões é também observada uma acentuada correlação negativa entre estas duas componentes do desempenho, sendo mais notória para os fundos internacionais. Estes resultados são semelhantes aos obtidos por outros estudos já realizados e consistentes com a hipótese dos mercados eficientes. Adicionalmente, foram detectados indícios de uma deficiente especificação da carteira de mercado e/ou da omissão de factores relevantes no modelo base, assim como de estratégias de investimento similares entre os fundos.In this paper, we apply the Henriksson and Merton (1981) model in the original version and as well as in the context of Arbitrage Pricing Theory, with the purpose of investigating timing and selectivity abilities of Portuguese mutual funds (national, European Union and internacional funds). The results obtained with the two versions are similar and suggest that fund managers do not possess selectivity and timing skills, and there is even some evidence of negative timing. In both versions we can also observe a high negative correlation between these two components of performance, being stronger in the case of international funds. This type of evidence has also been found in other studies and is consistent with the efficient market hypothesis. In addition, evidence of weak specification of the market portfolio and/or the omission of relevant factors in the model was found, as well as similar investment strategies among the funds

On the persistence of mutual fund performance in small markets

The issue of persistence in fund performance is a major topic of debate in the finance literature, assuming great importance not only in terms of academic research but also in terms of practical investors' decision making. Recent evidence suggests that future performance is predictable from past performance, that is, funds with superior (inferior) performance in the past are likely to remain good (bad) performers in the future. This research addresses the persistence of mutual fund performance in a small market (the Portuguese equity fund market). We identify some of the problems in evaluating fund persistence in the context of limited sample size and using the peer group median as benchmark for contingency table analysis of performance persistence. The criteria for assessing performance persistence based on the contingency table methodology of repeated winners and losers are presented in terms of significance statistics, adjusted for small sample bias. The appropriateness of each criteria under different circumstances is also discussed. The analysis of the returns of all Portuguese domestic equity funds, since a representative number was established, shows significant performance persistence (on a quarterly basis). The persistence, however, disappears when the returns are controlled for the various dimensions of risk. We also have documented significant risk persistence. Furthermore, for more or less frequent intervals of measurement, the industry persistence is rejected, although individual funds exhibit superior/inferior performance.A persistência do desempenho dos gestores de investimentos tem assumido um papel de destaque na literatura financeira, revestido-se de grande importância não só ao nível da investigação académica, mas também ao nível do processo de tomada de decisão do investidor. Estudos recentes sugerem que o desempenho futuro de fundos de investimento é previsível a partir do seu desempenho passado, isto é, fundos com um desempenho superior/inferior tenderão a manter esse bom/mau desempenho no futuro. Esta pesquisa aborda a persistência do desempenho de fundos de investimento num contexto de mercado de pequena dimensão (mercado de fundos de acções em Portugal). Neste âmbito, procedemos à identificação de alguns dos problemas decorrentes da avaliação do desempenho dos fundos num contexto de amostra reduzida. Seguindo a metodologia baseada em tabelas de contingência, apresentamos, comparamos e discutimos os vários critérios de avaliação da persistência do desempenho em termos de significância estatística ajustada para o enviesamento decorrente da dimensão da amostra. Os resultados da análise efectuada às rendibilidades dos fundos portugueses evidenciam, em geral e de forma significativa, persistência do desempenho (numa base trimestral). Contudo, este fenómeno desaparece quando as rendibilidades são ajustadas a várias dimensões do risco. A investigação também revela evidência significativa de persistência do risco. Podemos ainda observar que, para maiores e menores intervalos de tempo, a persistência do desempenho em termos globais desaparece, embora alguns fundos, individualmente, evidenciem um desempenho consistentemente superior/inferior

Conditioning information in mutual fund performance evaluation: Portuguese evidence

We estimate and compare the performance of Portuguese-based mutual funds that invest in the domestic market and in the European market using unconditional and conditional models of performance evaluation. Besides applying both partial and full conditional models, we use European information variables, instead of the most common local ones, and consider stochastically detrended conditional variables in order to avoid spurious regressions. The results suggest that mutual fund managers are not able to outperform the market, presenting negative or neutral performance. The incorporation of conditioning information in performance evaluation models is supported by our findings, as it improves the explanatory power of the models and there is evidence of both time-varying betas and alphas related to the public information variables. It is also shown that the number of lags to be used in the stochastic detrending procedure is a critical choice, as it will impact the significance of the conditioning information. In addition, we observe a distance effect, since managers who invest locally seem to outperform those who invest in the European market. However, after controlling for public information, this effect is slightly reduced. Furthermore, the results suggest that survivorship bias has a small impact on performance estimates

A avaliação do desempenho condicional de fundos de investimento e o problema das regressões espúrias: um estudo empírico para o mercado português

Neste artigo é avaliado e comparado o desempenho de fundos de acções pertencentes ao mercado Português, que investem quer no mercado local quer no mercado Europeu, utilizando modelos de avaliação do desempenho condicionais e não condicionais. Em vez das habituais variáveis locais, este estudo utiliza variáveis de informação pública europeias e analisa detalhadamente o impacto nas estimativas do desempenho da utilização de variáveis condicionais sujeitas a um processo estocástico de remoção da tendência (“detrended”), de modo a evitar os efeitos decorrentes de potenciais regressões espúrias. Os resultados sugerem que os gestores dos fundos não são capazes de “bater” o mercado, apresentando desempenhos negativos ou neutros. Para além disso, é possível observar um efeito distância, na medida em que os gestores que investem no mercado local apresentam um desempenho superior ao dos que investem no mercado Europeu. A introdução da condicionalidade melhora quer as estimativas de desempenho quer o poder explicativo dos modelos, com evidência de betas (mas não de alfas) variáveis ao longo do tempo. No entanto, a utilização de variáveis “detrended” permite concluir que a significância estatística das variáveis de informação se deve à existência de regressões espúrias

The conditional performance of euro bond funds: evidence from Portugal during the debt crisis

This paper evaluates the performance of a survivorship bias-free data set of Portuguese funds investing in Euro-denominated bonds by using conditional models that consider the public information available to investors when the returns are generated. We find that bond funds underperform the market significantly and by an economically relevant magnitude. This underperformance cannot be explained by the expenses they charge. Our findings support the use of conditional performance evaluation models, since we find strong evidence of both time-varying risk and performance, dependent on the slope of the term structure and the inverse relative wealth variables. We also show that survivorship bias has a significant impact on performance estimates. Furthermore, during the European debt crisis, bond fund managers performed significantly better than in non-crisis periods and were able to achieve neutral performance. This improved performance throughout the crisis seems to be related to changes in funds’ investment styles

The performance of European SRI funds investing in bonds and their comparison to conventional funds

This paper evaluates the performance of European SRI fixed-income funds domiciled in France and in Germany compared to characteristics-matched conventional funds. Fund performance is evaluated by means of conditional multi-factor models that allow for both time-varying risk and performance. The results show that SRI balanced funds perform similarly to conventional funds, whereas SRI bond funds significantly outperform their peers. The outperformance of SRI bond funds seems more related to their government (and not their corporate) bond holdings. Compared to conventional funds, SRI funds are significantly less exposed to bonds issued by the countries most affected by the Euro sovereign debt crisis, which is consistent with more conservative and long term oriented investment strategies.We acknowledge the funding of: 1) UNIAG, R&D unit funded by the FCT – Portuguese Foundation for the Development of Science and Technology, Ministry of Science, Technology and Higher Education. Project ‘UID/GES/ 4752/2016’; 2) COMPETE reference n° POCI-01-0145-FEDER-006683, with the FCT/MEC’s (Fundação para a Ciência e a Tecnologia, I.P.) financial support through national funding and by the ERDF through the Operational Programme on ‘Competitiveness and Internationalization – COMPETE 2020 under the PT2020 Partnership Agreement.’info:eu-repo/semantics/publishedVersio

Evaluación del desempeño condicional de fondos de bonos en euros: evidencia de Portugal durante la crisis de la deuda

This paper evaluates the performance of a survivorship bias-free data set of Portuguese funds investing in Euro-denominated bonds by using conditional models that consider the public information available to investors when the returns are generated. We find that bond funds underperform the market significantly and by an economically relevant magnitude. This underperformance cannot be explained by the expenses they charge. Our findings support the use of conditional performance evaluation models, since we find strong evidence of both time-varying risk and performance, dependent on the slope of the term structure and the inverse relative wealth variables. We also show that survivorship bias has a significant impact on performance estimates. Furthermore, during the European debt crisis, bond fund managers performed significantly better than in non-crisis periods and were able to achieve neutral performance. This improved performance throughout the crisis seems to be related to changes in funds’ investment styles.Este trabajo evalúa el desempeño de un conjunto de fondos portugueses, libre de sesgo de supervivencia, que invierten en bonos denominados en euros mediante el uso de modelos condicionales que consideran la información pública disponible para los inversores cuando se generan los retornos. Observamos que los fondos de renta fija presentan un desempeño inferior al mercado y por una magnitud económicamente relevante. Este bajo desempeño no puede explicarse por las comisiones que cobran. Nuestros hallazgos apoyan el uso de modelos de evaluación del desempeño condicional, ya que encontramos fuertes evidencias tanto de riesgo como de desempeños variables al longo del tiempo, dependientes de la estructura temporal de tajas de juro y de la riqueza relativa inversa. También mostramos que el sesgo de supervivencia tiene un impacto significativo en las estimaciones de desempeño. Además, durante la crisis de la deuda europea, los gestores de fondos de renta fija obtuvieron resultados significativamente mejores que en los períodos sin crisis y lograron un desempeño neutral. Este mejor desempeño a lo largo de la crisis parece estar relacionado con cambios en los estilos de inversión de los fondos.Compete 2020, Portugal 2020, Feder, FCTinfo:eu-repo/semantics/publishedVersio

Style and performance of international socially responsible funds in Europe

This paper analyses the performance and investment styles of internationally oriented Socially Responsible Investment (SRI)funds, domiciled in eight European markets, in comparison with characteristics-matched conventional funds. To the best of our knowledge, this is the first multi-country study, focused on inter-national SRI funds (investing in Global and in European equities), to combine the matched-pairs approach with the use of robust conditional multi-factor performance evaluation models, which allowfor both time-varying alphas and betas and also control for home biases and spurious regression biases. In general, the results show that differences in the performance of international SRI funds and their conventional peers are not statisti-cally significant. Regarding investment styles, SRI and conventional funds exhibit similar factor exposures in most cases. In addition,conventional benchmarks present a higher explaining power of SRI fund returns than SRI benchmarks. Our results also show significant differences in the investment styles of SRI funds according to whether they use “best-in-class” screening strategies or not. When compared to SRI funds that employ simple negative and/or positive screens, SRI “best-in-class” funds present significantly lower exposures to small caps and momentum strategies and significantly higher exposures to local stocks.COMPETE, QREN, FEDER, Fundação para a Ciência e a Tecnologia (FCT