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Performance Implications of Active Management of Institutional Mutual Funds

Although mutual fund performance has been dissected from almost every angle, very little attention has been paid to the connection between the actual active decisions made by management and the subsequent performance outcomes. In this paper we use information on institutional mutual funds to examine the implications of their active decisions made with respect to active positions, style and cash holdings for the fund's realised alpha, tracking error and information ratio. We identify some areas where the funds across the entire sample have success (active positions, and growth and winning stock divergences) and many others where they fall short (e.g. value and loser stock divergences). We identify that there is significant variation in these findings when we extend our analysis to examine the impact of these active decisions on performance for different styles of funds during periods of weak and strong markets. Value funds prove to be by far the best in the active positions that they make but losing across the board with their style divergences. Finally, we highlight the importance in style choice on the overall performance of a fund and identify the superiority of the value style over its competitors.

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File URL: http://www.uts.edu.au/sites/default/files/wp13.pdf
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Paper provided by The Paul Woolley Centre for Capital Market Dysfunctionality, University of Technology, Sydney in its series Working Paper Series with number 13.

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Length: 31 pages
Date of creation: 01 Sep 2011
Date of revision:
Handle: RePEc:uts:pwcwps:13
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  1. Ron Bird & Lorenzo Casavecchia & Paolo Pellizzari & Paul Woolley, 2009. "The Impact on the Pricing Process of Costly Active Management and Performance Chasing Clients," Working Paper Series 3, The Paul Woolley Centre for Capital Market Dysfunctionality, University of Technology, Sydney.
  2. Aymen Karoui & Iwan Meier, 2009. "Performance and characteristics of mutual fund starts," The European Journal of Finance, Taylor & Francis Journals, vol. 15(5-6), pages 487-509.
  3. Martijn Cremers & Antti Petajisto, 2006. "How Active is Your Fund Manager? A New Measure That Predicts Performance," Yale School of Management Working Papers amz2370, Yale School of Management, revised 01 May 2009.
  4. Dimitri Vayanos & Paul Woolley, 2013. "An Institutional Theory of Momentum and Reversal," Review of Financial Studies, Society for Financial Studies, vol. 26(5), pages 1087-1145.
  5. Jeffrey A. Busse & Amit Goyal & Sunil Wahal, 2010. "Performance and Persistence in Institutional Investment Management," Journal of Finance, American Finance Association, vol. 65(2), pages 765-790, 04.
  6. K. J. Martijn Cremers & Antti Petajisto, 2009. "How Active Is Your Fund Manager? A New Measure That Predicts Performance," Review of Financial Studies, Society for Financial Studies, vol. 22(9), pages 3329-3365, September.
  7. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
  8. Carhart, Mark M, 1997. " On Persistence in Mutual Fund Performance," Journal of Finance, American Finance Association, vol. 52(1), pages 57-82, March.
  9. Golec, Joseph H., 1996. "The effects of mutual fund managers' characteristics on their portfolio performance, risk and fees," Financial Services Review, Elsevier, vol. 5(2), pages 133-147.
  10. Amit Goyal & Sunil Wahal, 2008. "The Selection and Termination of Investment Management Firms by Plan Sponsors," Journal of Finance, American Finance Association, vol. 63(4), pages 1805-1847, 08.
  11. Michael C. Jensen, 1968. "The Performance Of Mutual Funds In The Period 1945–1964," Journal of Finance, American Finance Association, vol. 23(2), pages 389-416, 05.
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