Returns from Investing in Equity Mutual Funds 1971 to 1991

Abstract

Several recent studies suggest that equity mutual fund managers achieve superior returns and that considerable persistence in performance exists. This study utilizes a unique data set including returns from all equity mutual funds existing each year. These data enable us more precisely to examine performance and the extent of survivorship bias. In the aggregate, funds have underperformed benchmark portfolios both after management expenses and even gross of expenses. Survivorship bias appears to be more important than other studies have estimated. Moreover, while considerable performance persistence existed during the 1970s, there was no consistency in fund returns during the 1980s. THE ACADEMIC VIEW OF the pricing of securities has become considerably more complicated over the past decade. By the early 19708, the efficient market hypothesis became the accepted paradigm in the academy. The history of past stock prices appeared to provide no helpful information in predicting future price movements. Moreover, securities' prices appeared to incorporate all fundamental information so rapidly and efficiently that an uninformed investor, buying at the current tableau of, prices, could earn returns equivalent to those available to the experts. In short, markets were proclaimed to be remarkably efficient.By the early 1980s, however, several cracks appeared in the efficient market edifice. Returns from stocks from period to period were not independent: they were positively correlated over short time spans and negatively correlated when measured over longer periods.' Also, various seasonal and day-of-the-week patterns were isolated. Moreover, there appeared to be a considerable degree of predictability of stock returns on the basis of certain fundamental variables, such as initial dividend yields, market capitalization (size), price-earnings ratios, and price-to-book-value ratios.2 Of course, return predictability need not imply inefficiency of equity markets. Time-series tests of return predictability may reflect rational variation through time in ex-*Malkiel is from Princeton University. I am indebted to Yexiao Xu for invaluable research assistance, to Lipper Analytic Services for providing the datasets, to Ren6 Stulz and an anonymous referee for very helpful comments, and to Princeton University's Center for Economic Policy Studies for financial support.'Earlier work suggests that serial correlation coefficients for stock returns were close to zero. See, for example, Kendall(1953), Osborne (19591, Alexander (19611, andMoore (1964). 'See Fama (19911, Fama and French (19921, and Fluck, Malkiel, and Quandt (1993) for a review of the literature on return predictability. 3Similar results were reported by "reynor (1965) and Sharpe (1966). *If persistence is driven by consistent poor performance, investors would not be able to earn excess returns unless they could sell a fund short. Moreover, if positive persistence is influenced by survivorship bias (as will be indicated below), selection of funds by past superior performance...

Emerging market mutual fund performance: Evidence for Poland

“…The negative relationship between expense ratio and risk-adjusted performance were previously reported for US industry by Elton et al (1993), Malkiel (1995) and Carhart (1997. Inverse relationship was reported for mature European countries (Dahlquist et al (2000) and Otten & Bams (2002)).…”

“…1 See for instance Jensen (1969), Malkiel (1995), Gruber (1996), Carhart (1997) and French (2008). 2 For instance Dermine and Röller (1992) on French mutual funds, Ward and Saunders (1976), Shukla and Imwegen (1995) and Blake and Timmerman (1998) on UK funds, Wittrock and Steiner (1995) on German funds, Ter Horst, Nijman and De Roon (1998) on Dutch funds, Fernandez.…”

The Impact of Idiosyncratic Risk on Mutual Fund Fees

“…We estimate this relationship separately for advisory fees and non-advisory (i.e. 12b-1 and marketing) fees, since Malkiel (1995) indicates that those two components of the total expense ratio could have significantly different impacts on the overall relationship between the total expense ratio of a fund and its annual returns. For robustness, we use four different OLS regression specifications: yearfixed effects with standard errors clustered by fund, to account for serial correlation in the residuals; year-fixed effects, with standard errors clustered by time, to account for cross-sectional correlations in the residuals; year-fixed effects, with standard errors clustered by both fund and time (Petersen (2009));and Fama and MacBeth (1973) cross-sectional regressions with Newey and West (1987) heteroskedasticity and autocorrelation robust standard errors.…”

“…Explicitly, several papers including Gruber (1996), Malkiel (1995), Carhart (1997), Sirri and Tufano (1998), Harless and Peterson (1998), Wermers (2000), Wermers (2003), Christoffersen and Musto (2002), Hortacsu and Syverson (2004), Kuhnen (2005), Gil-Bazo and Ruiz-Verdú (2009) have provided evidence of a puzzling negative relationship between advisory fees and mutual fund (gross or net) performance. This evidence has awkward economic implications, since it is incompatible with even the most charitable interpretation of investor rationality as it suggests that investors are willing to pay aboveaverage advisory fees to their underperforming managers.…”

Can Mutual Fund Managers Pick Stocks? Evidence from their Trades Prior to Earnings Announcements

“…So, one must usually maintain a hypothesis 1 The literature examining mutual fund performance is vast. An abbreviated list of studies would include: Jensen (1968), Ippolito (1989), Malkiel (1995), and Carhart (1997), who conclude that mutual fund managers have little or no stock-picking skill; Grinblatt and Titman (1993), Daniel, Grinblatt, Titman, and Wermers (1997), Chen, Jegadeesh, and Wermers (2000), and Wermers (2000), who conclude that a significant degree of skill exists; and Lehman and Modest (1987) and Ferson and Schadt (1996), who emphasize the sensitivity of conclusions to methodological choices.…”