Mutual Fund Performance and Manager Style. J.L. Davis, FAJ, Jan/Feb 01, 19-27 - PowerPoint PPT Presentation

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Mutual Fund Performance and Manager Style. J.L. Davis, FAJ, Jan/Feb 01, 19-27

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Mutual Fund Performance and Manager Style. J.L. Davis, FAJ, Jan/Feb 01, 19-27 Various studies examined the evidence of persistence in mutual fund performance. – PowerPoint PPT presentation

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Title: Mutual Fund Performance and Manager Style. J.L. Davis, FAJ, Jan/Feb 01, 19-27


1
Mutual Fund Performance and Manager Style. J.L.
Davis, FAJ, Jan/Feb 01, 19-27
  • Various studies examined the evidence of
    persistence in mutual fund performance.
  • General consensus is that a few fund managers do
    tend to consistently appear near the top of the
    return rankings.

2
Mutual Fund Performance and
  • Strong evidence that some fund managers
    consistently appear near the bottom of the
    ranking.
  • The implication for investors Small likelihood
    of consistently earning abnormal returns by
    seeking individual fund managers.

3
Mutual Fund Performance and
  • Objective of this Study Examine the relationship
    between equity fund performance and manager
    style.
  • 1. Examine whether any investment style reliably
    delivers abnormal performance
  • 2.Evidence of performance per- sistence based
    on style.

4
Mutual Fund Performance and
  • Data and Methodology
  • Data
  • US Mutual Fund Database from CRSP.
  • Time period 1965-1998.
  • Data is free of Survivorship bias.
  • Explain the problem with survivorship bias.

5
Mutual Fund Performance and
  • Selection Criteria for funds to be included in
    the data set
  • 1. If a funds stated objective was growth,
    growth and income, maximum capital gains,
    small-cap growth, or aggressive growth
  • 2. Objective not listed but policy statement
    indicated that they primarily invested in common
    stocks.

6
Mutual Fund Performance and
  • Sample consisted of 4,686 funds covering 26,564
    fund-years from 1962-98, i.e.,in 26,564 time the
    fund was classified as an equity fund and had at
    least one valid monthly return.
  • The median equity weight for the fund year 93
    percent.

7
Mutual Fund Performance and
  • Style Identification
  • Fama-French three factor model as presented
    below is used to infer funds investment style.
  • RitRftaibi(Rm,tRf,t)si SMBt
  • hiHMLmei,t
  • Where,
  • Rit the percentage return to fund i,

8
Mutual Fund Performance and
  • Rft the U.S. T-bill rate
  • Rmt the return on the CRSP value weighted
    index,
  • SMBt small cap return - large cap return,
  • HMLt value return growth return.
  • et the error term.

9
Mutual Fund Performance and
  • Factor loading (sign of coefficients)
  • 1. Small company stocks positive si
  • 2. Large company stocks negative si
  • 3. Value factor positive hi
  • 4. Growth factor negative hi
  • 5. Intercept (?) measures

10
Mutual Fund Performance and
  • performance relative to three
  • factor model.
  • Funds were identified as small cap or large cap
    on the basis of SMB slopes and as value or growth
    on the basis of HML slope.

11
Mutual Fund Performance and
  • Portfolio Formation Funds were placed in style
    portfolios at the beginning of each year from
    1965.
  • Returns for the previous 36 months were used to
    estimate performation slopes on the HML and SMB
    factors.
  • Based on the slopes, funds were allocated into
    portfolios, and returns

12
Mutual Fund Performance and
  • were calculated for each month of 1965.
  • The process was repeated for each year.
  • Univariate SMB and HML sorts to form decile
    portfolios and bivariate sorts to form portfolios
    based on intersection of the HML and SMB ranking.

13
Mutual Fund Performance and
  • Funds were divided into thirds (low, medium and
    high) on the basis of SMB and HML rankings.
  • This 3x3 partition produced nine portfolios -
    high SMB/Low HML (small/growth) portfolio.

14
Mutual Fund Performance and
  • Test of performance persistence used bivariate
    sorts on HML and ? and SMB and ?. For example,
    (Low HML/Low ?) implies growth emphasis and
    performed poorly compared with the three-factor
    benchmark.

15
Mutual Fund Performance and
  • Tests of Abnormal Returns
  • 1. Davis, Fama and French - three factor model
    (excess market returns, the size and value-growth
    factors) have explanatory power
  • 2. If premiums associated with size and value
    can be earned by passive strategy by buying
    diversified portfolios with desired level of
    risk,

16
Mutual Fund Performance and
  • therefore, an active manager should be able to
    outperform such passive strategy.
  • Results- Style Based Portfolio
  • Table 1- Three Factor Results, HML Sorts.
  • Panel A Sorted by HML slope
  • Panel B Regression Results
  • R2 and t values indicate in favor

17
Mutual Fund Performance and
  • of three factor model.
  • - HML coefficient growth
  • HML coefficient value
  • Deciles 1-6 growth based on HML
  • Deciles 7-10 value based on HML
  • Deciles 1-4 positive ?
  • Deciles 5-10 negative ?
  • Decile 10 (?-.2) and significant, i.e.,
    underperformance

18
Mutual Fund Performance and
  • Summary Value fund did not performed better than
    growth fund.
  • Table 2 - Three Factor Results, SMB Sorts.
  • R2 close to 1.
  • ? negative and insignificant.
  • Three factor model is appropriate

19
Mutual Fund Performance and
  • Table 3- Independent HML and SMB sorts portfolios
  • Panel A
  • Low- Low corresponds to large-growth portfolio
  • High-High corresponds to small-value portfolio
  • No style portfolio show reliable abnormal
    profit,a tendency for value

20
Mutual Fund Performance and
  • funds to under perform growth fund is clear when
    SMB sensitivity is held constant.
  • Conclusion from Tables 1-3 Value funds performed
    poorly over the past 30 year period.

21
Mutual Fund Performance and
  • Table 4 Independent sorts on HML and ?.
  • Panel A Average for each portfolio
  • Panel B Regression coefficients
  • Panel C Regression results one year after
    formation
  • Panel A The spread in ? value between low and
    high ? portfolio is about 1 percentage point.

22
Mutual Fund Performance and
  • Panel B For high HML portfolio, all three ?
    values are negative, i.e, value funds have not
    done well.
  • Low HML/high ? has a .14 ? value, i.e., some
    growth mangers have been able to maintain good
    performance over short period. Advantage
    disappears in Panel C.

23
Mutual Fund Performance and
  • Table 5 Independent sorts on SMB and ?.
  • Panel A The spread in ? value between low and
    high ? portfolio is about 150 bps.
  • Panel B The spread falls to 25 bps.
  • Panel C Spread is less than 10 bps.
  • Conclusion Some evidence of persistence, but
    dies quickly.

24
Mutual Fund Performance and
  • Conclusion
  • No investment style generated abnormal returns
    over 1965-98.
  • Small evidence of persistence among best
    performing funds more evidence of performance
    persistence among poor-performing funds
  • Funds did not capture value premium.
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