Another Puzzle: The Growth In Actively Managed Mutual Funds. Professor Martin J. Gruber

Transcription

1 Another Puzzle: The Growth In Actively Managed Mutual Funds Professor Martin J. Gruber

2 Bibliography Modern Portfolio Analysis and Investment Analysis Edwin J. Elton, Martin J. Gruber, Stephen Brown and William Goetzmann, John Wiley and Sons, Sixth Edition,

3 The Performance of Publicly Offered Commodity Funds Edwin J. Elton, Martin J. Gruber and Joel C. Rentzler, Financial Analysts Journal, July-August 1990 New Public Offerings, Information, and Investor Rationality: The Case of Publicly Offered Commodity Funds Edwin J. Elton, Martin J. Gruber and Joel C. Rentzler, Journal of Business, January 1989 Professionally Managed Publicly Traded Commodity Funds Edwin J. Elton, Martin J. Gruber and Joel C. Rentzler, Journal of Business, April

4 Efficiency With Costly Information: A Reinterpretation of Evidence From Managed Portfolios Edwin J. Elton, Martin J. Gruber, Sanjiv Das and Matthew Hlavka, The Review of Financial Studies, 1993 The Performance of Bond Mutual Funds Christopher R. Blake, Edwin J. Elton and Martin J. Gruber, Journal of Business, July 1993 Fundamental Economic Variables, Expected Returns, and Bond Fund Performance Edwin J. Elton, Martin J. Gruber and Christopher R. Blake, Journal of Finance, September 1995 Survivorship Bias and Mutual Fund Performance Edwin J. Elton, Martin J. Gruber and Christopher R. Blake, The Review of Financial Studies, Winter

5 The Persistence of Risk-adjusted Mutual Fund Performance Edwin J. Elton, Martin J. Gruber and Christopher R. Blake, Journal of Business, April 1996 Another Puzzle: the Growth in Actively Managed Mutual Funds Martin J. Gruber, Journal of Finance, June 1996 Do Investors Care About Sentiment? Edwin J. Elton, Martin J. Gruber and Jeff Busse, Journal of Business, October 1998 Common Factors in Mutual Funds Returns Edwin J. Elton, Martin J. Gruber and Christopher R. Blake, European Finance Review, November

6 Spiders: Where Are the Bugs? Edwin J. Elton, Martin J. Gruber George Comer and Kai Li, Journal of Business, June 2002 A First Look at the Accuracy of the CRSP Mutual Fund Database and Comparison With Morningstar Data Edwin J. Elton, Martin J. Gruber and Christopher R. Blake, Journal of Finance, December 2001 Incentive Fees and Mutual Funds Edwin J. Elton, Martin J. Gruber and Christopher R. Blake, Journal of Finance, April 2003 Are Investors Rational: Choices Among Index Funds Edwin J. Elton, Martin J. Gruber and Jeff Busse, Journal of Finance, February

7 U.S. Mutual Funds by Type (market value) Money Market 24% Fixed Income 16% Equity 60% Based on 1/30/05 Assets Total $8.00 Trillion 7

8 Growth of Mutual Funds by Type Billions of U.S. Dollar Bond & Income Money Market Equity

9 9

10 Growth of U.S. Mutual Funds by Type (Market Value) Year Money Market Bond & Income Equity Total year avg. 8.7% 10.0% 1.6% 3.2% 10

11 Growth of U.S. Mutual Funds by Type (Market Value) Year Money Market Bond & Income Equity Total year avg. 8.7% 10.0% 1.6% 3.2% 11

12 Percent of U.S. Households Owning Mutual Funds 60% 50% 49% 52% 50% 48% 48% 44% 40% 37% 30% 24% 25% 27% 31% 20% 20% 10% 6% 11% 12% 0% Inside employees sponsored plans 32.5% Outside employee sponsored plans 35.1% 12

13 Average Performance Index Funds Closed End Funds The Persistence Of Performance Expenses What Accounts For Cash Flow How Well Do Investors Do 13

14 Customer Services including record keeping, the ability to move money around among funds, and daily valuation Low Transaction Costs Low Cost Diversification Professional Management (security diversification) 14

15 Open end mutual funds sell at the net asset value. If good management exists, a fund which has superior management will sell at net asset vale. If bad management exists, a fund which has inferior management will sell at net asset value. Management is not priced. Counter argument. 15

16 16 i F M Mi i F i e R R R R + + = ) ( β α R i R F α i M β i ( ) ( ) ( ) ( ) i F B Bi V G Gi L S Si F M Mi i F i e R R R R R R R R R R = β β β β α i i R M R α =

17 Return Per Year Years Manager A Manager B Manager C % 0.6% 0.8% % 37.4% 36.1% % 18.8% 19.2% % 0.6% 1.0% % 24.5% 24.4% % 10.9% 11.1% 17

18 Return Based Style Analysis Excess Return On Fund = Constant Excess Sensitivity + Return on to S& P S& P + Return on Sensitivity Small Minus + to Size Large Index Sensitivity Return on Sensitivity Excess + + to Growth Minus to Bond Return on + Random Growth Value Index Index Bond Index 18

19 Average Performance R i -R M α β M ρ Open End Nonsurviving α β M β S β G β B ρ 2 Open End Nonsurviving

20 Average Performance R i -R M α β M ρ Maximum Capital Gains Growth Growth and Income α β M β S β G β B ρ 2 Maximum Capital Gains Growth Growth and Income

21 Index Funds S&P Funds 1.24% 1 Small Stock 0.88% No Growth, Value, or Bond Fund 1994 Over 100 Index Funds 44 S&P Funds % Good Tracking (R 2 =.997) Low Cost 21

22 Closed end funds sell at an average discount of 10% Investors are only willing to pay 90 cents for $1 in assets under management Why will they pay $1 for $1 under management in open end? Management is not priced in open end funds 22

23 Ranked By Previous 1-Year Alpha Decile 1 year alpha Bottom Top Spearman Rank * * Top Bottom * * Significant at 1% level ** Significant at 5% level 23

24 Ranked By Previous Expense Ratio Decile 1 year alpha High Low Spearman Rank Low High * * Significant at 1% level 24

25 Realized Annual Three Year Four Index Alpha Predicted By 3 Year Alpha Decile Bottom Top 10 Spearman Rank Top Bottom * Significant at 1% level 3 year alpha * * 25

26 Realized Annual Three Year Four Index Alpha Predicted By Expense Ratio Decile High Low Spearman Rank Low High Expense ratios are reported from high to low * Significant at 1% level Exp Ratio * 26

27 Expense Ratios for Deciles Formed on the Basis of Four Index Alphas: Decile (t) t t t t t Mean

28 Annual Cash Flows for Deciles Formed on the Basis of Four Index Alphas in the Year Following Formation Decile Spearman Rank Top Bottom * Significant at 1% level % Change in Cash Flow * * 28

29 Annual Realized Cash Flow Weighted Alpha Buy at End of Quarter Return on Cash Flows 1Quarter Holding Period 1Year 3 Years Positive Negative Weighted Avg

30 0. 80% 0. 60% Annual Average Alpha 0. 40% 0. 20% 0. 00% % % % Months L. Zheng 30

31 1. Index funds outperform actively managed funds of the same risk Active funds 65b.p. below indexes. Charge fee of 130 b.p. Bring information worth 65b.p. but charge 130b.p. 2. Funds that charge higher fees tend to do worse that funds that charge lower fees 3. Funds that perform well have a slight tendency to continue to perform well Funds that perform really badly tend to continue to perform really badly 31

32 4. Investors seem to be aware of this. Funds that perform well have higher subsequent cash flows. Funds that perform badly have high cash out flows. 5. The result of this is that new investment and disinvestment earns a risk adjusted return slightly above that which would be earned on a set of index funds with the same risk. 32

33 A. A sophisticated clientele. B. A disadvantaged clientele. 1. Unsophisticated investors 2. Institutionally disadvantaged investors 3. Tax disadvantaged investors 33