New Insights Into Mutual Funds: Performance and Family Strategies

Abstract:     
New Insights into Mutual Funds is a bundle of four empirical studies on mutual funds. In the first two papers, we investigate persistence in risk-adjusted fund returns. We show that the returns of both equity and bond mutual funds are persistent. Funds that display strong (weak) performance over a past period continue to do so in future periods. More importantly, we demonstrate that some fund managers are able to outperform a strategy that invests in passive indexes for a short period of time. These results add new insights to long-running debates on the benefits of actively managed funds vis-à-vis passive portfolios. In the third paper, we test the cross-sectional explanatory power of multi-factor models to explain mutual fund returns. We find that performance estimates resulting from these models are biased because the factor proxies do not incorporate transaction costs and trading restrictions. We suggest that factor proxies based on mutual fund returns rather than stock returns provide better benchmarks to evaluate professional money managers. Finally, in the fourth paper we investigate the impact of fund marketing on investor flows to other funds in the family. We find that high-marketing funds generate spillovers, and enhance cash inflows to low-marketing funds in the family. An explanation of this observation is that funds with low marketing expenses are directly subsidized by family members with high marketing expenses. Our results indicate that at least part of the spillovers can be attributed to favoritism. These findings suggest that conflicts of interest between investors and fund families have been exacerbated by competition in the mutual fund industry.

Keywords: mutual funds, bond funds, performance evaluation, performance persistence, benchmark misspecification, marketing, cross-subsidization, favoritism

Working Paper Series