Performance and Characteristics of Actively Managed Institutional Equity Mutual Funds
H. Kent Baker
American University - Kogod School of Business
John A. Haslem
University of Maryland - Robert H. Smith School of Business
David M. Smith
State University of New York at Albany - School of Business
April 3, 2009
Journal of Investing, Vol. 18, No. 1, pp. 27-44, Spring 2009
In this study, we provide extensive evidence on the performance characteristics of 1,118 U.S. domestic, actively managed institutional equity mutual funds. We measure performance using such measures as three-year Sharpe ratios, Jensen's alphas, and Miller's active alphas as well as annualized Russell Index-adjusted returns over multiple periods (1, 3, 5, 10, 15 years). We relate performance to fund attributes including expense ratio class, net assets, 12b-1 fees dummy, turnover ratio, beta, cash, and dividend yield.
We analyze the disparity of expense ratios of actively managed institutional equity mutual funds and find that expense ratios differ widely among Morningstar categories. Consistent with previous studies involving actively managed retail equity mutual funds, we find strong evidence that the average actively managed institutional equity mutual fund cannot beat a representative benchmark after expenses.
We also examine fund characteristics partitioned by expense ratio class and conduct univariate tests. We obtain mixed results concerning whether funds with low expense ratios outperform those with higher expense ratios. Our findings are sensitive to the performance measure and time period used. Compared with mutual funds in high and very high expense ratio classes, our results show that funds in low or very low expense ratio classes have significantly lower deferred loads, 12b-1 fees, management fees, and portfolio turnover. In addition, lower expense ratio funds are larger and have managers with a longer tenure. This evidence suggests that expense-conscious institutional investors should look carefully at these characteristics before investing.
Our study provides new evidence that supports links between their performance of actively managed institutional equity mutual funds and fund attributes. Based on our multiple-regression regression, we find a consistently negative sign in the relation between expense ratio class and performance but statistical significance only for Miller's active alpha performance measure. There is strong support suggesting that larger institutional equity funds tend to outperform smaller institutional equity funds, which may reflect greater monitoring. This finding implies that institutional investors should focus on larger mutual funds as a means of enhancing their portfolio returns. We show that the effect of an institutional equity fund's holding cash on its performance is consistently positive and significant in six of the seven regressions. Our evidence shows statistically significant but mixed results for turnover, beta, and dividend yield. In addition, our results indicate no significant relation between performance and the existence of 12b-1 fees.
Finally, we compare our results with the extant mutual fund literature in order to link any potential difference in findings to the characteristics of institutional funds. Our analysis reveals that expenses have a weaker relation with fund performance for institutional funds than retail funds because institutional funds, on average, have substantially lower expenses. However, fund asset size appears to be a more important indicator of fund performance for institutional funds than for retail funds. Finally, for both institutional funds and retail funds, a positive relation exists between a higher percentage of cash held and better fund performance. These findings warrant further investigation.
Number of Pages in PDF File: 18
Keywords: performance characteristics, actively managed institutional mutual funds, expense ratio class, Miller active alpha, 12b-1 fees, deferred loads, management fees, portfolio turnover, institutional investors, beta, dividend yield
JEL Classification: G20, G23, G28
Date posted: April 13, 2009 ; Last revised: January 15, 2015