Cross-Sectional Learning and Short-Run Persistence in Mutual Fund Performance

Using monthly return data of more than 6,400 US equity mutual funds we investigate short-run performance persistence over the period 1984-2003. We sort funds into rank portfolios based on past performance, and evaluate the portfolios' out-of-sample performance. To cope with short ranking periods, we employ an empirical Bayes approach to measure past performance more efficiently. Our main finding is that when funds are sorted into decile portfolios based on 12-month ranking periods, the top decile of funds earns a statistically significant, abnormal return of 0.26 percent per month. This effect persists beyond load fees, and is mainly concentrated in relatively young, small cap/growth funds

New Insights into Mutual Funds: Performance and Family Strategies

Joop Huij was born in Amsterdam on August 11, 1979. He attended the Marnix Gymnasium in Rotterdam, at which he obtained a Gymnasium diploma (Dutch classical pre-university education) in 1997. From 1997 to 2002 Joop studied at Erasmus University Rotterdam. In 2002 he received his Master's degree in Informatics & Economics with appellation cum laude. In November 2002 he joined the Department of Financial Management of RSM Erasmus University as a PhD Candidate. His PhD trajectory was supported by the Erasmus Research Institute of Management (ERIM). He presented his research at several international conferences and seminars, including the 2003 OxMetrics Conference in London, the 2005 Eastern Finance Association meeting in Norfolk, the 2005 Financial Management Association meeting in Chicago, and the 2006 European Finance Association meeting in Zurich. The article version of the Chapter Cross-sectional Learning and Shortrun Persistence in Mutual Fund Performance" of his dissertation is accepted for publication in the Journal of Banking & Finance. During his PhD trajectory Joop visited London Business School and Vanderbilt University's Owen Graduate School of Management. Joop's teaching experience include Bachelor and Master courses in the (International) Business Administration programme as well as supervision of Bachelor and Master theses at RSM Erasmus University. Currently, Joop holds a position as Assistant Professor of Finance at RSM Erasmus university. His research interests include mutual funds, alternative investments, and empirical asset pricing.New Insights into Mutual Funds is a bundle of four empirical studies on mutual funds. In the first two papers, we investigate persistence in risk-adjusted fund returns. We show that the returns of both equity and bond mutual funds are persistent. Funds that display strong (weak) performance over a past period continue to do so in future periods. More importantly, we demonstrate that some fund managers are able to outperform a strategy that invests in passive indexes for a short period of time. These results add new insights to long-running debates on the benefits of actively managed funds vis-à-vis passive portfolios. In the third paper, we test the cross-sectional explanatory power of multi-factor models to explain mutual fund returns. We find that performance estimates resulting from these models are biased because the factor proxies do not incorporate transaction costs and trading restrictions. We suggest that factor proxies based on mutual fund returns rather than stock returns provide better benchmarks to evaluate professional money managers. Finally, in the fourth paper we investigate the impact of fund marketing on investor flows to other funds in the family. We find that high-marketing funds generate spillovers, and enhance cash inflows to low-marketing funds in the family. An explanation of this observation is that funds with low marketing expenses are directly subsidized by family members with high marketing expenses. Our results indicate that at least part of the spillovers can be attributed to favoritism. These findings suggest that conflicts of interest between investors and fund families have been exacerbated by competition in the mutual fund industry.New Insights into Mutual Funds is een bundeling van een viertal empirische studies naar de prestaties van beleggingsfondsen. In de eerste twee studies onderzoeken we in hoeverre de prestaties van beleggingsfondsen op korte termijn persistent zijn. Onze resultaten ondersteunen de opvatting dat prestaties van beleggingsfondsen uit het verleden een voorspellende waarde hebben voor hun toekomstige prestaties. Bovendien vinden we dat het mogelijk is om op basis van rendementen uit het voorgaande jaar een groep fondsen aan te wijzen, die systematisch een passieve beleggingsstrategie verslaat. Dit geldt zowel voor aandelenfondsen, als voor obligatiefondsen. Deze bevindingen bieden nieuwe inzichten in langlopende discussies over de toegevoegde waarde van professioneel vermogensbeheer bij beleggingsfondsen. In de derde studie dragen we bij aan de bestaande literatuur door te onderzoeken in hoeverre multi-factormodellen in staat zijn de rendementen van beleggingsfondsen te verklaren. De voornaamste reden om deze studie te verrichten, is ons vermoeden dat prestatiemetingen door deze modellen verkeerde schattingen opleveren. Multi-factormodellen maken namelijk gebruik van rendementen op hypothetische aandelenportefeuilles als referentiepunt en houden geen rekening met transactiekosten en handelsrestricties. We stellen een alternatieve methode voor, waarbij gebruik gemaakt wordt van de rendementen van andere beleggingsfondsen als referentiepunt, en laten zien dat deze methode een beter beeld geeft van de prestaties van beleggingsfondsen. Tenslotte onderzoeken wij in hoeverre de marketing van bepaalde fondsen een positieve invloed heeft op geldstromen naar andere fondsen binnen dezelfde fondsgroep. We vinden dat kleine en jongere beleggingsfondsen, die zelf weinig aan marketing uitgeven, maar onderdeel zijn van een fondsgroep die als geheel wel veel aan marketing uitgeeft, aanzienlijk grotere geldstromen ontvangen dan vergelijkbare fondsen die geen onderdeel zijn van een dergelijke fondsgroep. Een mogelijke verklaring voor deze resultaten is dat beleggingsfondsen met lage marketinguitgaven gesubsidieerd worden. We ontwikkelen en toetsen een aantal hypothesen om deze verklaring te evalueren. Onze resultaten wijzen uit dat fondsgroepen bepaalde beleggingsfondsen inderdaad systematisch bevoordelen ten koste van andere fondsen. Investeerders zouden zich ervan bewust moeten zijn dat marketingkosten voor andere doeleinden aangewend kunnen worden dan waarvoor ze eigenlijk bestemd zijn

On the Use of Multifactor Models to Evaluate Mutual Fund Performance

We show that multifactor performance estimates for mutual funds suffer from systematic biases, and argue that these biases are a result of miscalculating the factor premiums. Because the factor proxies are based on hypothetical stock portfolios and do not incorporate transaction costs, trade impact, and trading restrictions, the factor premiums are either over- or underestimated. We argue that factor proxies based on mutual fund returns rather than stock returns provide better benchmarks to evaluate professional money managers

Spillover Effects of Marketing in Mutual Fund Families

This paper investigates the presence of spillover effects of marketing in mutual fund families. We find that funds with high marketing expenses generate spillovers, and enhance cash inflows to family members with low marketing expenses. In particular, low-marketing funds that are operated by a family with high marketing expenses have substantially larger inflows after positive returns than otherwise similar funds that are operated by a family with low marketing expenses, while they have smaller outflows after negative returns. One way to interpret the spillovers is that they are a by-product of individual fund marketing whereby the entire family is made more visible to investors. An alternative explanation of this observation is that funds with low marketing expenses are directly subsidized by family members with high marketing expenses. We develop and perform a set of tests to evaluate these two alternative hypotheses. The results of all tests support the subsidization hypothesis, and suggest that at least part of the spillovers can be attributed to favoritism. These results suggest that conflicts of interest between investors and fund families have been exacerbated by competition in the mutual fund industry

Evaluating the performance of global emerging markets equity exchange-traded funds

We examine the performance of passively managed exchange-traded funds (ETFs) that provide exposure to global emerging markets equities. We find that the tracking errors of these funds are substantially higher than previously reported levels for developed markets ETFs. ETFs that use statistical index replication techniques turn out to be especially prone to high tracking errors, and particularly so during periods of high cross-sectional dispersion in stock returns. At the same time, we find no convincing evidence that these funds earn higher returns than ETFs that rely on full-replication techniques

De Woningmarkt bestaat niet

Door de stagnerende prijsontwikkelingen op de woningmarkt is de discussie over de prijsontwikkeling opgelaaid. De woningmarkt wordt in deze discussie onterecht als één geheel beschouwd

Residual Momentum

Conventional momentum strategies exhibit substantial time-varying exposures to the Fama and French factors. We show that these exposures can be reduced by ranking stocks on residual stock returns instead of total returns. As a consequence, residual momentum earns risk-adjusted profits that are about twice as large as those associated with total return momentum; is more consistent over time; and less concentrated in the extremes of the cross-section of stocks. Our results are inconsistent with the notion that the momentum phenomenon can be attributed to a priced risk factor or market microstructure effects

Lucky bets and hot hands - Is your fund manager really performing?

Congratulations! You are a lucky winner! All too often we receive email messages like these in our inbox and they invariably turn out to be nothing but a scam. But why be lucky? For the manager, the financial equivalent of winning is in outperforming benchmarks or the markets, preferably through the application of skill, insight and experience, not pure luck

REIT Momentum and the Performance of Real Estate Mutual Funds

REITs exhibit a strong and prevalent momentum effect that is not captured by conventional factor models. This REIT momentum anomaly hampers proper judgments about the performance of actively managed REIT portfolios. In contrast, a REIT momentum factor adds incremental explanatory power to performance attribution models for REIT portfolios. Using this factor, this study finds that REIT momentum explains a great deal of the abnormal returns that actively managed REIT mutual funds earn in aggregate. Accounting for exposure to REIT momentum also materially influences cross-sectional comparisons of the performances of REIT mutual funds. This study has important implications for performance evaluation, alpha--beta separation, and manager selection and compensation

Another look at trading costs and short-term reversal profits

Several studies report that abnormal returns associated with short-term reversal investment strategies diminish once trading costs are taken into account. We show that the impact of trading costs on the strategies' profitability can largely be attributed to excessively trading in small cap stocks. Limiting the stock universe to large cap stocks significantly reduces trading costs. Applying a more sophisticated portfolio construction algorithm to lower turnover reduces trading costs even further. Our finding that reversal strategies generate 30-50 basis points per week net of trading costs poses a serious challenge to standard rational asset pricing models. Our findings also have important implications for the understanding and practical implementation of reversal strategies