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Abstract:
We evaluate the academic research on mutual fund performance in the US and UK concentrating particularly on the literature published over the last 20 years where innovation and data advances have been most marked. The evidence suggests that ex-post, there are around 2-5% of top performing UK and US equity mutual funds which genuinely outperform their benchmarks whereas around 20-40% of funds have genuinely poor. Key drivers of relative performance are, load fees, expenses and turnover. There is little evidence of successful market timing. Evidence on picking winners suggests past winner funds persist, particularly when rebalancing is frequent (i.e., less than one year) - but transactions costs and fund fees imply that economic gains to investors from actively switching into winner funds may be marginal. However, recent research using more sophisticated sorting rules (e.g., Bayesian approaches) indicate possible large gains from picking winners, when rebalancing monthly. The evidence also clearly supports the view that past loser funds remain losers. Broadly speaking results for bond mutual funds are similar to those for equity mutual funds but hedge funds show better ex-post and ex-ante risk adjusted performance than do mutual funds. Sensible advice for most investors would be to hold low cost index funds and avoid holding past "active" loser funds. Only very sophisticated investors should pursue an active investment strategy of trying to pick winners - and then with much caution.

Mutual fund performance, persistence, smart money

Abstract:
Using a comprehensive data set on (surviving and non-surviving) UK mutual funds (April 1975 - December 2002), we use a bootstrap methodology to distinguish between 'skill' and 'luck' for individual funds. This methodology allows for non-normality in the idiosyncratic risks of the funds - a major issue when considering those funds which appear to be either very good performers or very bad performers, since these are the funds which investors are primarily interested in identifying. Our study points to the existence of genuine stock picking ability among a small number of top performing UK equity mutual funds (i.e. performance which is not solely due to good luck). At the negative end of the performance scale, our analysis strongly rejects the hypothesis that poor performing funds are merely unlucky. These funds demonstrate 'bad skill'. Recursive estimation and Kalman 'smoothed' coefficients indicate temporal stability in the performance alpha of winner and loser portfolios.

Mutual fund performance, bootstrapping, fama-french model

Abstract:
There have been major advances in both theory and econometric techniques in mainstream macro-models and parallel advances in knowledge of the monetary transmission mechanism acting via asset prices. At the same time, behavioral finance has provided evidence that not all actors in the economy are fully rational and this has influenced models of asset pricing on which part of the monetary policy transmission mechanism depends. Such uncertainty about the behavior of asset prices has in part stimulated a move towards robustness, as an important criterion for guiding monetary policy. We argue that although we have discovered much, including what not to do, nevertheless our knowledge of the transmission mechanism is very incomplete. This is because, in spite of all the theoretical advances that have been made, there is still considerable uncertainty over the behavior of agents, which has been reinforced by insights from behavioral finance.

Abstract:
There have been major advances in both theory and econometric techniques in mainstream macro-models and parallel advances in knowledge of the monetary transmission mechanism acting via asset prices. At the same time, behavioral finance has provided evidence that not all actors in the economy are 'fully rational' and this has influenced models of asset pricing on which part of the monetary policy transmission mechanism depends. Such uncertainty about the behaviour of asset prices has in part stimulated a move towards 'robustness', as an important criterion for guiding monetary policy. We argue that although we have discovered much, including 'what not to do', nevertheless our knowledge of the transmission mechanism is very incomplete. This is because, in spite of all the theoretical advances that have been made, there is still considerable uncertainty over the behaviour of agents, which has been reinforced by insights from behavioral finance.

Monetary policy, behavioral finance, financial markets

Abstract:
We apply a recent nonparametric methodology to test the market timing skills of UK equity mutual funds. The methodology has a number of advantages over the widely used regression based tests of Treynor-Mazuy (1966) and Henriksson-Merton (1981). We find a relatively small number of funds (around 1.5%) demonstrate positive market timing ability at a 5% significance level, while around 10-20% of funds exhibit negative (perverse) timing and most funds do not time the market. Our findings indicate that the few skillful market timers possess private market timing signals so their performance cannot be attributed to publicly available information. In terms of fund classifications, there are a small number of successful positive market timers amongst equity income and general equity funds, while a few small company funds time a small company rather than a broad market index. We also apply regression based tests of volatility timing and find evidence that a slightly larger (around 5%) of funds successful time market volatility.

Mutual funds performance, market timing

Abstract:
In this paper we analyse whether the consumption based capital asset pricing model is consistent with asset return data from the French and German stock markets. We evaluate the performance of the CCAPM by applying the non-parametric methodology of Hansen and Jagannathan (1991) and adopting alternative specifications of utility. The first specification assumes standard power utility, or time separable constant relative risk aversion (TS-CRRA) while the second allows for habit persistence (TNS-HP) and the final specification follows an Abel (1990) type model. We find that the model is consistent with the data. However, high degrees of risk aversion are implied for the models to be consistent. Incorporating habit persistence only partially reduces the implied levels of risk aversion.

Habit Persistence, Volatility Bounds, Risk Aversion, Sharpe Ratio

Abstract:
We use a multiple hypothesis testing framework to estimate the false discovery rate (FDR) amongst UK equity mutual funds. For all funds, we find a relatively high FDR for the best funds of 67% (at a 10% significance level), which indicates that only around 2% of all funds truly outperform their benchmarks. For the worst funds the FDR (at a 10% significance level), is relatively small at 15.9% which results in 20% of funds which truly underperform their benchmarks. For different investment styles, this pattern of very few genuine winner funds is repeated for all companies, small companies and equity income funds. However, forming portfolios of funds based on a set of funds for which the FDR is relatively low, produces positive alphas.

Mutual fund performance, false discovery rate

Abstract:
The UK's defined benefit pensions industry makes widespread use of pooled investment vehicles which are provided by a large number of fund management groups. In this paper we provide the first comprehensive performance analysis of these funds. Using data on 734 pooled funds, that had a combined value of just over 400 billion pounds at the end of 2007, ranging from UK equity to funds specialising in Pacific Basin equities, we found almost no statistically significant evidence that the managers of these funds generate alpha, or can time the market. With increasing numbers of UK fund managers purporting to be able to provide high alpha products to the UK's beleaguered pensions industry, our results do not give us great confidence that the solution to the widespread deficits lies in the hands of the UK's active institutional investment managers.