Section3 Returns equity mutual funds.ppt(1).ppt

Returns from investing in equity mutual funds 1971 to 1991,Burton G.MalkielJOF 1995,Introduction,Early 1970s,EMH acceptedBy the early 1980s,several cracks:returns are not independent and correlated over time.The predictability of returnsMost efficiency test are joint testsEugene Fama:”Sequels are rarely as good as the originals.”,Jensen(1968):performance of mutual funds was inferior to randomly selected portfolios with equivalent riskHenriksson(1984):fund managers have enough private information to offset expenses.hot hand phenomenon,Section 1:dataSection 2:performance of the equity mutual fundsSection 3:hot hand phenomenonSection 4:simulate investment strategiesSection 5:relation between returns and expensesconclude,1 Survivorship bias and the data set employed,Todays investors are not interested in the funds that no longer exist,which creates the biases in the figures.High returns:the funds failed have been dropped out of the sampleTendency of more successful funds to survive,overstated.,“incubator”fundsFunds data 1971-1991:all general equity funds sold to the public.Quarterly total returns.,Some survivorship in table 1,The differences is big,2.A closer look at performance,The t is only-0.21,so it is indistinguishable from 0.even surviving funds do not produce excess returns for investors after expenses.The numbers of positive alpha and negative alpha are approximately equal.Table 3,Grossman and Stiglitz(1980):positive alphas for pre-expense returns confirm that mutual funds do earn gross returns to cover expensesBut positive alphas are small and insignificant.EGDH(1993):inappropriate benchmarks,if corrects for the non-S&P stocks,the positive alphas disappear.,The 1980s:small stocks tended to underperform the S&P stock index.10-year sample limitedThere is relationship between returns and betas in mutual funds.The betas are stableOver 20 year period 1971 to 1991,the relationships between betas and total returns disappear.,3.The“Hot Hand”Phenomenon:the persistence of mutual fund returns,Hot hand:mutual funds that achieved above average returns continue to enjoy superior performance.Expense ratios will also influenceAnalyze the predictability of performance by two-way tables showing successful performance over successive periods.,Weaker during the 1980s,4 simulations of strategies based on the persistence,Whether the persistence of performance is economically significant.After simulation:a large number of strategies based on the persistence of returns would have produced excess returns during the 1970s.But not 1980s,4.A strategies involving the purchase of top performing funds,The analysis support that investors who put money into actively managed funds might help themselves by purchasing funds with good recent records.,Several caveats:The results are not robustThe strategy worked during the 1970s for the 8%load charges and survivorship bias,4.B strategies involving the purchase of Forbes“Honor Roll”Funds.,5 An analysis of Expense Ratios,Relationship between management expenses and fund returns for the ten year from 1982-1991Negative relationship between expense ratio and its net performancePositive relationship between advisory expenses and performance,6 Concluding Comments,1971-1991 data and CAPM framework,but fail to document any evidence of excess return and fails to verify the risk return relationship posited by the CAPMGood performance continue:two cautions;survivorship bias;not robust since the strong persistence in 1970s does not exist during the 1980s,