An Evaluation of Studys of Fund Performance Finance Essay

The study of Dahlquist, Stefan and Paul (2000) analyzed the fund performance in Swedish. The study was conducted on the basis of Swedish mutual funds from the end of 1992 to the end of 1997. The study estimated the performance of Swedish funds from 1993 to 1997. The estimated the study then evaluated the relation between performance and fund attributes such as: inflows and outflows, size, turnover, etc. The results showed that larger equity funds tend to perform less well than smaller equity funds. On the other hand larger bond funds performed better than smaller bond funds.

Similarly the measured performance is negatively related to fees, that is, high fee funds seem not to perform as well as low fee funds. Wermers (2000) conducted a research to analyze the performance of the mutual fund industry from 1975 to 1994. Therefore study used two comprehensive mutual fund databases of the US industry. These two databases were merged to provide a complete record of the fund’s existed during the sample period. Study then decomposed fund returns and costs into various components in order to address problematic issues to the study of mutual fund performance. The results indicated that the funds that hold stocks outperformed the market. Stehle and Olaf (2001) conducted a research to evaluate the open-ended mutual funds risk-adjusted performance. Study used a data set that included all German funds sold to the public in 1972. The research analyzed covers the time period of 1973 to 1998. DAX, which included the 30 largest German stocks and DAX100, which included the 100 largest German stocks were used as benchmarks for comparison.

First of all researchers examined the rates of return of individual funds with the help of Sharpe (1966) and Jensen measures and then applied the same measures to evaluate the unweighted average rates of return of all funds. In case of the rates of return of individual funds, results showed that the funds underperform the appropriate benchmarks by approximately 1.5 % per year. On the other hand underperformance was reduced by 40 % in case of unweighted average rates of return. Study also concluded that the large German stock mutual funds, on the average, performed better than the small ones. Galagedera and Param (2002) conducted a research to analyze the relative efficiency of Australian mutual funds and examine the sensitivity of the results for various combination of input and output variables.

Study employed a sample of 257 Australian mutual funds for the period 1995-1999. After applying data envelopment analysis (DEA) and logistic regression study concluded that when DEA captures fund’s long-term growth and income distribution than a shorter time horizon more funds show efficient. Study also concluded that fund’s efficiency depends to a large extent, on the ‘asset allocation score’ and that the DEA ranking of funds is independent of the time horizon used. Therefore all these observations provide guidance to analysts in selecting the appropriate input and output variables when using DEA in mutual fund appraisal. In order to identify the determinants of after-tax performance, pretax performance, and tax efficiency, a study was conducted by Peterson (2002). For this purpose a sample of 1,170 diversified U.S. equity funds over the period of 1981-98 was used. Study applied two-step estimation technique in the analysis. The results indicated that funds that were historically tax efficient outperformed comparable funds on an after-tax basis.

The results also showed that pretax performance, investment style, risk and expenses were important determinants of after-tax and pretax returns. Study suggested that taxable investors should not make investment decisions with tax efficiency as the sole focus. Instead, study emphasized maximizing after-tax returns (for the chosen risk tolerance). A study was conducted by Cesari and Panetta (2002) to examine the risk-adjusted performance of funds. Sample of study was comprised of all the equity funds in existence in Italy from 1984 to 1995. Study analyzed the risk-adjusted performance by using net returns as well as gross returns. Single factor and multifactor benchmarks were used for the purpose of comparison.

Similarly managers’ market-timing ability is taken into account by using the CAPM and multifactor models. The results showed that with gross returns, the performance is always positive. Results also showed that the return on Italian government bonds was slightly higher than the return on Italian equities during sample period. A study was conducted by Otten, and Mark (2002) to compare the performance of European mutual fund industry with performance of United States fund industry. Sample of 506 European open-ended mutual funds and 2096 American open-ended mutual funds was taken from January 1991 to December 19979. Study was restricted the sample to purely domestic equity funds with at least 24 months of data. Results also indicated that European mutual funds had on average a better performance than the American counterparts and that the small cap mutual funds in both Europe and the United States outperformed the benchmark and all other mutual funds. A study was conducted by Artikis (2002) to analyze the risk adjusted performance of equity mutual funds operating in Greek from 1995-1998. For this purpose daily, weekly and monthly returns were calculated and compared with the GIASE. These funds were ranked on the basis of standard deviation, total risk, and techniques of Treynor (1965) , Sharpe (1966), and Jensen.

The results showed that coefficient of variations of seven mutual funds were higher than the GIASE whereas the total risk of all the seventeen mutual funds was lower than the GIASE. On the other hand Treynor (1965) ‘s index showed values higher than the General Index of the ASE. Sorros (2003) examined the performance of equity mutual funds. For this purpose a sample of sixteen equity funds was taken for the period 1995-1999. The average daily returns of all the sample funds were calculated and these funds were ranked on the basis of the systematic risk, return, coefficient of variation, and techniques of Sharpe (1966) and Treynor (1965). Results showed that total risk and risk-return coefficient of all the sixteen mutual funds was lower than Athens Stock Exchange (ASE). It also showed that four mutual funds achieved lower return than ASE. The author also concluded that eight sample funds varied to some extent between the techniques proposed by Sharpe (1966) and Treynor (1965). The study of Artikis (2003) evaluated the risk adjusted performance of the ten domestic mutual funds for the period 1/1/1995 – 31/12/1998. In doing so, the mutual funds under consideration were ranked on the basis of the return, and techniques of Treynor (1965), Sharpe (1966), and Jensen. The ten domestic balanced mutual funds participating in the research had lower return as compared to the return of General Index. However, this return appears to be satisfactory since the risk undertaken by these mutual funds was significantly lower than the corresponding risk of the General Index of the ASE. The ranking of the sample mutual funds varied to some extent among the techniques proposed by Treynor (1965), Sharpe (1966) and Jensen. Rao and Ravindran (2003) conducted a research to examine the performance of Indian mutual funds in a bear market for the period of September 1998 to April 2002. Initially study employed a sample of 269 open ended schemes (out of total schemes of 433) for computing relative performance index. But when study excluded those funds whose returns were lees than risk-free returns, only 58 schemes were left.

Study computed logarithmic returns from monthly closing NAVs and applied Treynor (1965)’s ratio, Sharp’s ratio, Sharp’s measure, Jensen’s measure, and Fama’s measure to evaluate the performance. The results showed that Out of 269 schemes, 49 were under performers, 102 were par performers and 118 were out performers of the market.

Study concluded that most of the mutual fund schemes in the sample of 58 were able to satisfy investor’s expectations by giving excess returns over expected returns. In order to analyze the Performance Selectivity, Market Timing and Persistence of Danish Mutual Fund a study was conducted by Christensen (2005). Study tried to provide evidence on performance evaluation for mutual funds that invest purely in the Danish market as well as mutual funds that invest outside Denmark. For this purpose this study employed a sample of 47 Danish mutual funds consisting of 34 equity funds and 13 fixed income funds from January 1996 to June 2003. Study applied single index model and a multi-factor model to analyze the selectivity. Parametric and non-parametric methodologies were used to examine performance persistence while the timing ability was analyzed with the help of quadratic regression and option approach. The results indicated that net of expenses none of the 47 Danish mutual funds had been able to obtain superior performance.

The researchers concluded that Danish mutual funds performed neutrally, returns were non-persistent and Danish mutual funds had no timing ability. Noulas, John and John (2005) evaluated the risk adjusted performance of Greek equity funds during the period 1997-2000. This study is based on weekly data for equity mutual funds and includes 23 equity funds that existed for the whole period under consideration. Mutual funds were ranked on the techniques used by Treynor (1965), Sharpe (1966) and Jensen. Results showed positive returns of the stock market for the first three years and negative returns for the fourth year. The results also indicated that the beta of all funds is smaller than 1 for four-year period. The authors concluded that the equity funds have neither the same risk nor the same return.

The investor needs to know the long-term behavior of mutual funds in order to make the right investment decision. Bauer, Roger and Alireza (2006) conducted a research to analyze the performance of New Zealand mutual funds for the period January 1990 till September 2003. Study employed a sample of 143 open-ended mutual funds, of which 30 were domestic equity, 63 international equity and 50 multisector, respectively. Study used different measures such as Single-factor performance model, Market timing model, Multifactor performance models, and Conditional multifactor performance model to evaluate the performance of the sample funds under period of analysis. The results indicated that New Zealand mutual funds had not been able to provide out-performance and that the balanced funds underperformed significantly. Researchers found no evidence of timing abilities by the fund managers but observed the return persistence for all funds in short term.

Researcher also found that the risk-adjusted performance for equity funds is positively related to fund size and expense ratio and negatively related to load charges. A study was conducted by Francis, Kim and Faff (2006) to examine the US mutual fund’s performance using the multiscaling approach: wavelet analysis. Study collected the monthly mutual fund returns for the US over the period January 1991 to December 2005. Sharpe (1966) ratio was used at various time scales to evaluate the performance of these three groups of mutual funds. Results indicated that since the risk and value (performance) were timescale-dependent therefore any attempt to measure performance must consider the investment horizon effect. Researcher concluded that in case of index fund, the size of funds does not matter in terms of the performance but in case of institutional and active funds, the funds with the higher net asset values consistently performed better than those with the lower net asset values. In order to evaluate the diversification benefits and performance persistence of U.S.-based global bond funds a study was conducted by Polwitoon and Tawatnuntachai (2006). For this purpose a sample of 188 global and 531 domestic bond funds was taken for the period 1993 to 2004. Study compared the performance of global bond funds to performance of domestic bond funds using both unconditional and conditional Sharpe (1966) ratios. The results showed that global funds underperformed broad-based benchmark indexes but concluded that the underperformance was less than the funds’ expense ratio.

Results also indicated that global funds provide higher total return and comparable risk-adjusted return to domestic bond funds. Leite and Cortez (2006) conducted a research to analyze the impact of using conditioning information in evaluating the performance of mutual funds. For this purpose two different samples of Portuguese-owned open end equity funds were built, over the period of June 2000 to June 2004. The first sample contained surviving 24 funds (10 National funds and 14 European Union funds) at the end of June 2004. While the second sample included all surviving and 20 non-surviving funds during the sample period.

Both conditional and unconditional models were used to evaluate the performance. The results of unconditional model indicated that the performance of National funds was neutral while the performance of European Union funds was negative. On the other hand conditional models suggested that conditional betas (but not alphas) are time-varying and dependent on the dividend yield variable. A study was conducted by Arugaslan, Ed and Ajay (2007) to evaluate the risk-adjusted performance of US mutual funds. Study employed a sample of 20 largest US-based mutual funds for the period 1995-2004. Study used Quarterly returns for computing the measures of return and risk. Modigliani and Modigliani (M Square) and Sortino Ratio are used to evaluate the performance.

Study identified the performance evaluation over a five-year (2000-2004) and ten-year (1995-2004) investment horizon. The authors concluded that funds with the highest returns faced higher risk due to which funds lose attractiveness. Boudreaux, S.P., Dan and Suzanne (2007) conducted a study to examine the risk adjusted returns of international mutual funds for the period of 2000-2006. For this purpose a sample of ten portfolios of international mutual fund was taken and risk-adjusted performance was calculated by using Sharpe (1966)’s Index of Reward to Variability ratio. US market of mutual funds was taken as the benchmark. The results showed that the performance of nine out of ten of the international mutual fund was higher than the U.S. market. Those portfolios which contained only U.S stock mutual funds underperform on a risk adjusted the funds that contained all international mutual funds. The authors concluded that Investors may not fully take advantage of possible portfolio risk reduction and higher returns if international mutual funds were excluded Abdullah, Taufiq and Shamsher (2007) conducted a research to analyze the difference in terms of performance between conventional and Islamic mutual funds in the context of Malaysian capital market.

For this purpose a sample of 65 funds out of which 14 were Islamic was taken. These monthly returns of these funds were analyzed from 1992-2001 by using Sharpe (1966) index, adjusted Sharpe (1966) index, and Jensen Alpha and KLCI was used as a market benchmark. Results showed that the performance of Islamic funds was lower than conventional funds during bullish economic conditions whereas it performed better than conventional funds during bearish economic trends. Results also showed that the two types of funds were unable to get at least 50 per cent market diversification levels. In order to examine the risk adjusted performance of Slovenian mutual funds, a study was conducted by Jagric, Boris and Sebastjan and Vita (2007). Study employed sample of only those funds which were older than three years in the period 1 January 1997 to 31 December 2003. Weekly returns of all the mutual funds were calculated for the sample period.

Study used Ljubljana Stock Exchange – SBI20 index (which is a market capitalization weighted average of the 15 largest companies) as a benchmark. Sharpe (1966) ratio, Treynor (1965) ratio, Jensen’s Alpha, and Treynor (1965) -Mazuy timing measure were used to evaluate the risk-adjusted performance. The researchers found that the rankings obtained by applying both the Sharpe (1966) and Treynor (1965) rules to be almost the same, implying that funds were well diversified and concluded that all analyzed funds outperformed the market. Study also concluded that some of the funds performed extremely well compared to other mutual funds worldwide. Arugaslan, Ed and Ajay (2008) examined the risk-adjusted performance of US-based international equity funds from 1994-2003. The analysis was done for five-year period 1999-2003 and ten-year period 1994-2003. For this a sample of 50 large US-based international equity funds was taken and a new method of measurement Modigliani and Modigliani (M squared) was applied. The performance was compared with both domestic and international benchmark indices.

The results showed that the risk has great impact on the attractiveness of Funds. Higher return funds may loose attractiveness due to higher risk while the lower return funds may be attractive to investors due to the lower risk. Fernández, Vicente and Andrada (2008) conducted a research to compare the average return on Spanish mutual funds with inflation, stock market investment and Spanish government bonds.

The analysis was done during the period 1991-2007 and Index of the Madrid Stock Exchange (ITBM) was taken as benchmark. Study employed a sample of 935 mutual funds and made the analysis on 3, 5, 10 and 16 years basis. Various tables and charts were used for the purpose of comparison. The results concluded that during the past 10 and 16 years, the average return on mutual funds in Spain was lower than the average return on government bonds.

Similarly the average return on mutual funds was also lower than the inflation. On the other hand out of 935 only 30 mutual funds outperformed the benchmark and only two of them outperformed the overall Index of the Madrid Stock Exchange (ITBM). Dietze, Oliver and Macro (2009) conducted a research to evaluate the risk-adjusted performance of European investment grade corporate bond mutual funds. Sample of 19 investment-grade corporate bond funds was used for the period of 5 years (July 2000 – June 2005). Funds were evaluated on the basis of single-index model and several multi-index and asset-class-factor models. Both maturity-based indices and rating based indices were used to account for the risk and return characteristics of investment grade corporate bond funds. The results indicated that the corporate bond funds, on average, underperformed the benchmark portfolios and there was not a single fund exhibiting a significant positive performance. Results also indicated that the risk-adjusted performance of larger and older funds, and funds charging lower fees was higher.

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