Mutual fund performance and the incentive to invest in active management

Mutual fund performance and the incentive to invest in active management
Author: Diane Del Guercio
Publisher:
Total Pages: 53
Release: 2011
Genre: Economics
ISBN:


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It is well known that within U.S. domestic equity mutual funds, actively managed funds significantly underperform index funds. However, this comparison ignores the fact that mutual funds targeted at different types of investors charge different fees, and use these fees to provide different bundles of services. To control for these differences, we compare the performance of actively managed funds and index funds within each of three broad market segments: retail funds sold directly to investors, retail funds sold through brokers, and institutional funds. We find that underperformance is strongest in the broker-sold segment and weakest in the direct-sold segment. In fact, we find that within the direct-sold segment, the risk-adjusted, after-fee returns of actively managed funds are statistically indistinguishable from those of index funds, consistent with the equilibrium condition in Grossman and Stiglitz (1980). To rationalize differences in performance, we test for differences in the flow-performance relation across the three segments. We find that fund flows respond most strongly to risk-adjusted returns in the direct-sold segment. We find a wide variety of evidence that direct-sold funds respond to investor preferences for risk-adjusted performance by investing more in active management. Our findings suggest that the underperformance of the average actively managed fund reflects its weaker incentives to generate alpha rather than an inability to generate alpha. We argue that our findings also help to explain the continued demand for actively managed funds.


Mutual fund performance and the incentive to invest in active management
Language: en
Pages: 53
Authors: Diane Del Guercio
Categories: Economics
Type: BOOK - Published: 2011 - Publisher:

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It is well known that within U.S. domestic equity mutual funds, actively managed funds significantly underperform index funds. However, this comparison ignores
Mutual Fund Performance and the Incentive to Generate Alpha
Language: en
Pages:
Authors: Diane Del Guercio
Categories:
Type: BOOK - Published: 2011 - Publisher:

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Financial economists have long been puzzled by investor demand for actively managed funds that generate, on average, negative after-fee, risk-adjusted returns.
Investment Criteria for Mutual Fund Selection
Language: en
Pages: 87
Authors: Jan Harkopf
Categories: Business & Economics
Type: BOOK - Published: 2016-10-07 - Publisher: diplom.de

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The importance of mutual funds for individual investors has increased in recent decades. This becomes apparent when looking at the increased share of households
Morningstar Guide to Mutual Funds
Language: en
Pages: 304
Authors: Christine Benz
Categories: Business & Economics
Type: BOOK - Published: 2003-02-17 - Publisher: John Wiley & Sons

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Praise for Morningstar Guide to Mutual Funds "Picking actively managed mutual funds is no mean challenge. And as the recent era underscores, past performance is
Mutual Funds
Language: en
Pages: 169
Authors: Seth Anderson
Categories: Business & Economics
Type: BOOK - Published: 2006-03-30 - Publisher: Springer Science & Business Media

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Mutual funds are the dominant form of investment companies in the United States today, with approximately $7 trillion in assets under management. Over the past