Mutual Fund Performance and Performance Persistence

Transcription

1 Peter Luckoff Mutual Fund Performance and Performance Persistence The Impact of Fund Flows and Manager Changes With a foreword by Prof. Dr. Wolfgang Bessler GABLER RESEARCH

2 List of Tables List of Figures xix xxiii Introduction ' - ' 1 I Delegated Portfolio Management 11 1 Institutional Setting 11 2 Agency Conflicts 77 II Investment Performance Performance Measurement Dynamic Aspects of Mutual Fund Performance 243 III Empirical Study Objectives, Data and Methodology Performance Persistence Fund Flows and Manager Changes as Equilibrium Mechanisms Time Effects, Extreme Flows and Capacity Constraints 477 Conclusion and Outlook 509 A Appendix, 527 Bibliography 551

3 List of Tables List of Figures v xix - xxiii Introduction 1 I Delegated Portfolio Management 11 1 Institutional Setting Role of Mutual Funds Objectives of Investors Investment Strategies Return Predictability and Equilibrium Considerations Active versus Passive Investing Specific Investment Strategies Indexing and Enhanced Indexing Fundamental Indexing Active Long-Only Strategies Active Long-Short Strategies Activist Investors Organizational Design Open-End Funds Exchange-Traded Funds Retail Structured Products Closed-End Funds Hedge Funds Comparison of Different Structures Discussion 74

4 xii Contents 2 Agency Conflicts Potential Conflicts of Interest Investors and Portfolio Managers Career Concerns and Tournaments Herding..' Investors and Investment Management Companies Distribution Channels and Advertisement Fund Families and "Star" Managers Benchmark Gaming and Performance Manipulation Costs and Potential Third-Party Benefits Costs '^Directed Brokerage and Soft Dollars Market Timing and Late Trading Discussion Potential Solutions for Reducing Agency Conflicts Investment Strategy and Instruments External Governance Ill Transparency and Competition Ill Market-Based Control Internal Governance Fund Board Manager Changes Optimal Fund Size Incentive Contracts and Ownership Structures Performance-Based Compensation Ownership Structures Discussion 132 II Investment Performance Performance Measurement Choice of the Correct Performance Measure Asset Class and Investment Strategy Existing Portfolio 139

5 xiii Chronological Focus Institutional Setting Ratio-Based Performance Evaluation Information Ratio and Sharpe Ratio Treynor Ratio Ratios for Non-Normally Distributed Returns Risk-Based Performance Evaluation Jensen Model Benchmark Problem../ Time Variability Statistical Problems Multifactof Models 157 j , Fama-French Model: Size and Value Effect Carhart Model: Momentum Effect Construction of Factor-Mimicking Portfolios Timing Models and Conditional Performance Evaluation Interpretation of Multifactor Models Risk-Based Explanations Time-Varying Asset Composition Macroeconomic Risk, Business Cycle and Default Risk Foreign Exchange Risk Liquidity Risk Higher Moments and Downside Risk Idiosyncratic Risk Behavioral Explanations Microstructure Effects...' Methodological Issues Statistical Issues Discussion....' Portfolio-Information-Based Performance Evaluation Characteristic-Based Models Holdings-Based Models Trade-Based Models Improved Statistical Methods._ 203

6 3.6.1 Bootstrapping Bayesian Approach Daily Data Controlling for Cross-Correlation Empirical Results on Active Mutual Funds Fund Performance Investor Performance Implications for Active Mutual Fund Management Cross-Sectional Performance Determinants.-.-.' Managerial Skill and Information-Related Determinants Investment Style '"information Access 227 A Manager Characteristics, /8.2 Cost-Related Determinants Fund-Related Determinants Discussion Dynamic Aspects of Mutual Fund Performance Performance Persistence and Predictability Performance Persistence Potential Data Biases Methodological Aspects Potential Model Biases Discussion Performance-Flow Relationship Characteristics of Fund Flows Performance-Flow Relationship Shape of the Performance-Flow Relationship Impact of Costs and Brokers on Fund Flows ' Speed of Reaction Evidence from Gross Flows Discussion Fund Flows as Equilibrium Mechanism Cash Position Transaction Costs and Distorted Security Selection 283

7 xv Ownership Market Capitalization Portfolio Concentration Discussion Manager Changes as Equilibrium Mechanisms Winner Funds Loser Funds Empirical Results Interaction with Fund Flows '.''.' Approaches to Reduce the Detrimental Impact of Flows on Performance Redemption" Restrictions Fee Structure Creation Restrictions Trading and Pricing Mechanisms Investment Strategy Organizational Fund Structure Discussion 325 III Empirical Study Objectives, Data and Methodology Objectives Data Methodology Ranked Portfolio Test Formation Evaluation Regression Approach Performance Persistence Research Questions and Hypotheses Performance and Characteristics of Decile Portfolios Characteristics Performance 354

8 xvi Contents Alternative Ranking Measures Performance of Individual Decile Funds Objective Methodology Bayesian Alphas Alternative Estimation Methodologies Alternative Formation and Evaluation Periods Migration Fund Flows and Manager Changes as Equilibrium Mechanisms Research Questions and Hypotheses Winner Funds Loser Funds Methodology Portfolio Formation Specification of Multifactor Models Winner Funds Single sorting Double sorting Loser Funds Single Sorting Double Sorting Winner-Minus-Loser Spread Before-Fee Analysis Regression Analysis Model Specification Results Discussion Time Effects, Extreme Flows and Capacity Constraints Research Questions and Hypotheses Alternative Formation and Evaluation Periods Winner Funds Loser Funds ' Extreme Fund Flows and Fund Size 487

9 xvii Portfolio Formation Winner Funds Loser Funds Interaction of Fund Flows and Fund Size Portfolio Formation Winner Funds Loser Funds 504 Conclusion and Outlook A Appendix 527 A.I Factor-Mimicking Portfolios 527 A.2 Sample Selection. 529 A.3 Alternative Estimation Methodologies 530 A.4 Alternative Formation and Evaluation Periods 531 A.4.1 Winner Funds 531 A.4.2 Loser Funds 533 A.5 Extreme Fund Flows and Fund Size 538 A.5.1 Winner Funds 538 A.5.2 Loser Funds 543 A.6 Interaction of Fund Flows and Fund Size 549 Bibliography 551