Do Mutual Funds Perform When it Matters Most to Investors? U.S. Mutual Fund Performance and Risk in Recessions and Expansions

Quarterly Journal of Finance, Vol. 1, No. 3, November 2011

Posted: 25 Aug 2011 Last revised: 5 Sep 2011

See all articles by Robert Kosowski

Robert Kosowski

Imperial College Business School; CEPR (Centre for Economic Policy Research); University of Oxford, Oxford-Man Institute of Quantitative Finance; Unigestion UK

Multiple version iconThere are 2 versions of this paper

Date Written: August 25, 2011

Abstract

This paper shows that the stylized fact of average mutual fund underperformance documented in the literature stems from expansion periods when funds have statistically significant negative risk-adjusted performance and not recession periods when risk-adjusted fund performance is positive. These results imply that traditional unconditional performance measures understate the value added by active mutual fund managers in recessions, when investors' marginal utility of wealth is high. The risk-adjusted performance (or alpha) difference between recession and expansion periods is statistically and economically significant at 3 to 5 percent per year. Our findings are based on a novel multi-variate conditional regime-switching performance methodology used to carry out one of the most comprehensive examinations of the performance of US domestic equity mutual funds in recessions and expansions from 1962 to 2005. The findings are robust to the choice of the factor model (including bond and liquidity factor extensions), the use of NBER business cycle dates, fund load, turnover, expenses and percentage of equity holdings.

Keywords: mutual funds, portfolio choice, asset pricing, asymmetric information, business cycles, Markov-switching models

JEL Classification: C22, D8, E32, G11, G12, G23

Suggested Citation

Kosowski, Robert, Do Mutual Funds Perform When it Matters Most to Investors? U.S. Mutual Fund Performance and Risk in Recessions and Expansions (August 25, 2011). Quarterly Journal of Finance, Vol. 1, No. 3, November 2011. Available at SSRN: https://ssrn.com/abstract=1916598

Robert Kosowski (Contact Author)

Imperial College Business School ( email )

South Kensington Campus
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+442075943294 (Phone)

HOME PAGE: http://www3.imperial.ac.uk/people/r.kosowski

CEPR (Centre for Economic Policy Research) ( email )

London
United Kingdom

HOME PAGE: http://www.cepr.org/

University of Oxford, Oxford-Man Institute of Quantitative Finance ( email )

Eagle House
Walton Well Road
Oxford, Oxfordshire OX2 6ED
United Kingdom

Unigestion UK

4 Stratford Place
London, W1C1AT
United Kingdom

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