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Why mutual funds "underperform"

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  • Glode, Vincent

Abstract

I propose a parsimonious model that reproduces the negative risk-adjusted performance of actively managed equity mutual funds. In the model, a fund manager can generate state-dependent active returns at a disutility. Negative expected performance and mutual fund investing simultaneously arise in equilibrium because the active return the fund manager generates covaries positively with a component of the pricing kernel that the performance measure omits, consistent with recent empirical evidence. Using data on U.S. funds, I also document new empirical evidence consistent with the model's cross-sectional implications.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Financial Economics.

Volume (Year): 99 (2011)
Issue (Month): 3 (March)
Pages: 546-559

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Handle: RePEc:eee:jfinec:v:99:y:2011:i:3:p:546-559

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Web page: http://www.elsevier.com/locate/inca/505576

Related research

Keywords: Mutual fund Performance Business cycle Investment Pricing kernel;

References

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Citations

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Cited by:
  1. Ľuboš Pástor & Robert F. Stambaugh, 2012. "On the Size of the Active Management Industry," Journal of Political Economy, University of Chicago Press, vol. 120(4), pages 740 - 781.
  2. Marcin Kacperczyk & Stijn Van Nieuwerburgh & Laura Veldkamp, 2011. "Time-Varying Fund Manager Skill," NBER Working Papers 17615, National Bureau of Economic Research, Inc.
  3. Oueslati, Abdelmonem & Hammami, Yacine & Jilani, Faouzi, 2014. "The timing ability and global performance of Tunisian mutual fund managers: A multivariate GARCH approach," Research in International Business and Finance, Elsevier, vol. 31(C), pages 57-73.
  4. Wayne E. Ferson & Jerchern Lin, 2013. "Alpha and Performance Measurement: The Effects of Investor Disagreement and Heterogeneity," NBER Working Papers 19349, National Bureau of Economic Research, Inc.
  5. Robert F. Stambaugh, 2014. "Investment Noise and Trends," NBER Working Papers 20072, National Bureau of Economic Research, Inc.
  6. Kaniel, Ron & Kondor, Péter, 2011. "The delegated Lucas tree," CEPR Discussion Papers 8578, C.E.P.R. Discussion Papers.
  7. Mamatzakis, E & Babalos, Vassilios & filipas, n, 2013. "Fund Performance Evaluation in Greece Revisited: Evidence from the Impact of Operational Attributes," MPRA Paper 51640, University Library of Munich, Germany.
  8. Barth, Daniel, 2014. "The costs and beliefs impliedby direct stock ownership," Working Paper Series 1657, European Central Bank.
  9. Nelson Areal & Maria Cortez & Florinda Silva, 2013. "The conditional performance of US mutual funds over different market regimes: do different types of ethical screens matter?," Financial Markets and Portfolio Management, Springer, vol. 27(4), pages 397-429, December.
  10. Diane Del Guercio & Jonathan Reuter & Paula A. Tkac, 2010. "Broker Incentives and Mutual Fund Market Segmentation," NBER Working Papers 16312, National Bureau of Economic Research, Inc.
  11. Diane Del Guercio & Jonathan Reuter, 2011. "Mutual Fund Performance and the Incentive to Generate Alpha," NBER Working Papers 17491, National Bureau of Economic Research, Inc.
  12. Ling, Aifan & Sun, Jie & Yang, Xiaoguang, 2014. "Robust tracking error portfolio selection with worst-case downside risk measures," Journal of Economic Dynamics and Control, Elsevier, vol. 39(C), pages 178-207.
  13. André de Souza & Anthony W. Lynch, 2012. "Does Mutual Fund Performance Vary over the Business Cycle?," NBER Working Papers 18137, National Bureau of Economic Research, Inc.

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