Scale and skill in active management Pástor, Ľuboš; Stambaugh, Robert F.; Taylor, Lucian A.
Journal of financial economics,
04/2015, Volume:
116, Issue:
1
Journal Article
Peer reviewed
We empirically analyze the nature of returns to scale in active mutual fund management. We find strong evidence of decreasing returns at the industry level. As the size of the active mutual fund ...industry increases, a fund׳s ability to outperform passive benchmarks declines. At the fund level, all methods considered indicate decreasing returns, though estimates that avoid econometric biases are insignificant. We also find that the active management industry has become more skilled over time. This upward trend in skill coincides with industry growth, which precludes the skill improvement from boosting fund performance. Finally, we find that performance deteriorates over a typical fund׳s lifetime. This result can also be explained by industry-level decreasing returns to scale.
We examine the effect of behavioral biases on the mutual fund choices of a large sample of US discount brokerage investors using new measures of attention to news, tax awareness, and fund-level ...familiarity bias, in addition to behavioral and demographic characteristics of earlier studies. Behaviorally biased investors typically make poor decisions about fund style and expenses, trading frequency, and timing, resulting in poor performance. Furthermore, trend chasing appears related to behavioral biases, rather than to rationally inferring managerial skill from past performance. Factor analysis suggests that biased investors often conform to stereotypes that can be characterized as Gambler, Smart, Overconfident, Narrow Framer, and Mature.
Although the academic interest in ethical mutual fund performance has developed steadily, the evidence to date is mainly sample-specific. To tackle this critique, new research should extend to ...unexplored countries. Using this as a motivation, we examine the performance and risk sensitivities of Canadian ethical mutual funds vis-à-vis their conventional peers. In order to overcome the methodological deficiencies most prior papers suffered from, we use performance measurement approaches in the spirit of Carhart (1997, Journal of Finance 52(1): 57-82) and Ferson and Schadt (1996, Journal of Finance 51(2): 425-461). In doing so, we investigate the aggregated performance and investment style of ethical and conventional mutual funds and allow for time variation in the funds' systematic risk. Our Canadian evidence supports the conjecture that any performance differential between ethical mutual funds and their conventional peers is statistically insignificant.
A mutual fund is a common instrument for households and corporations to invest in the financial markets through diversified portfolios of securities. Investing in managed mutual funds involves ...relying on a fund manager’s knowledge, expertise, and investment strategy to beat the fund’s benchmark. The purpose of this paper is to help mutual fund investors in their fund selection process. The fuzzy-set qualitative comparative analysis (fsQCA) is the methodology applied to identify combinations of factors that facilitate the selection of performing mutual funds. The goal is to determine whether fund manager skill, as measured by Jensen’s Alpha and other qualitative factors, is a key driver of performance. Our research focuses on US-registered equity funds with a global investing scope over a 5-year period (2016–2021), and we combine three mutual fund databases to obtain more complete data while enhancing data accuracy and consistency. The findings reveal that both manager skill and fund size are pervasive factors included in all three successful combinations of sufficiency conditions leading to high-performance funds. In addition, it is verified that manager skill is the only necessary condition to ensure high returns on mutual funds. Investors’ fund selection process is a cumbersome task that can be simplified with the successful recipes provided by the fsQCA model.
ABSTRACT
We find that mutual funds whose managers are socially connected with firm auditors hold more shares of these firms and generate superior portfolio returns. Cross‐sectional results reveal ...that the relation between social connections and mutual fund stockholdings is more pronounced: when the social connections are stronger, when the auditor is in a better position or has stronger incentives to acquire private information, when the fund manager exercises more power, for small audit firms, for auditors in areas with poor investor protection, and for public firms with greater business opacity or private information. Other results are consistent with fund managers electing to schedule their corporate site visits to coincide with the fieldwork of their connected auditors, as would be expected if fund managers time their visits to meet with these auditors to facilitate information transfer. Additionally, we observe associations between fund trading prior to earnings surprises and audit opinions, and the presence of social connections between fund managers and firm auditors. Finally, we show that mutual funds and firms in which they invest tend to appoint connected auditors and pay them higher fees. Collectively, we document empirical patterns that would arise if socially connected auditors and mutual fund managers share information.
Methods Using the New York State Percutaneous Coronary Intervention (PCI) reporting system, we obtained 2014 PCI outcomes data from all PCI-performing hospitals that also had CMS star ratings ...reported on the CMS Hospital Compare website. The number of PCI cases performed increased with star rating and ranged from 437.1 ± 307.4 cases for 1 star hospitals to 1166.7 ± 858.7 cases for 4 star hospitals.
We use daily Internet search volume from millions of households to reveal market-level sentiment. By aggregating the volume of queries related to household concerns (e.g., "recession," ..."unemployment," and "bankruptcy"), we construct a Financial and Economic Attitudes Revealed by Search (FEARS) index as a new measure of investor sentiment. Between 2004 and 2011, we find FEARS (i) predict short-term return reversals, (ii) predict temporary increases in volatility, and (iii) predict mutual fund flows out of equity funds and into bond funds. Taken together, the results are broadly consistent with theories of investor sentiment.
Inspired by the recent health science findings that air pollution affects mental health and cognition, we examine whether air pollution can intensify the cognitive bias observed in the financial ...markets. Based on a proprietary data set obtained from a large Chinese mutual fund family consisting of complete trading information for more than 773,198 accounts in 247 cities, we find that air pollution significantly increases investors’ disposition effects. Analysis based on two plausible exogenous variations in air quality (the vast dissipation of air pollution caused by strong winds and the Huai River policy) supports a causal interpretation. Mood regulation provides a potential mechanism.
This study measures the financial impact of screening for environmental, social and governance criteria on corporate bond portfolios. Specifically, the risk-adjusted financial performance of 103 ...socially responsible bond funds in the US and the Eurozone is compared with a matched sample of conventional funds. During the period 2001–2014, socially responsible bond funds outperform by one-half of one percent annually. An evaluation of fund holdings and a performance-attribution analysis suggest that this outperformance is directly related to the mitigation of ESG risks, which is achieved by the exclusion of corporate bond issuers with poor corporate social responsibility activities. A separation of crisis and non-crisis periods further indicates that the outperformance is especially likely to occur during recessions or bear market periods. We confirm this crisis-related return effect from a sample of socially screened bond indices. Moreover, our results are robust to alternative definitions of sustainability, survivorship bias, fund characteristics and stable in the US and Eurozone sub-samples.
PDF
