The Open-End Japanese Mutual Fund Puzzle
44 Pages Posted: 23 Apr 1998
Date Written: November 1997
Recent empirical evidence has suggested that the Japanese mutual fund industry has underperformed dramatically in the past two decades. Conjectured reasons for under performance range from tax-dilution effect to high fees, high turnover and poor asset management. In this paper, we show that this underperformance is largely due to tax-dilution effects and not necessarily due to poor management. Using a broad database of funds which includes investment trusts closed to new investment we show that once an instrument for the time-varying tax-dilution exposure is included in a factor model, there is little evidence of poor risk-adjusted performance. A style analysis of the industry demonstrates that managers appear to pursue tax-driven dynamic strategies.
JEL Classification: G2, F3
Suggested Citation: Suggested Citation