Luck and skill in the performance of global equity funds in Central and Eastern Europe
ISSN: 0307-4358
Article publication date: 30 September 2022
Issue publication date: 27 March 2023
Abstract
Purpose
The authors examine the performance of individual global equity funds in Central and Eastern Europe (CEE) and separate the skill of their fund managers from luck.
Design/methodology/approach
The authors use cross-sectional bootstrap simulations to study the monthly net and gross returns of 175 funds over the period September 2005 to December 2019. Simulations are applied to three, four, and five-factor asset pricing models, and to regressions run on fund-specific benchmark indexes. The authors also examine the value added by all funds and by fund size groups.
Findings
Using multifactor models, a majority of the individual funds fail to deliver alpha, both net and gross of fees; whereas, most of the negative alphas appear due to poor skills, not bad luck. Relative to benchmark indexes, about 5% of the sample shows skill only gross of fees, indicating that fund management fees absorb this skill. As a whole, global equity funds in CEE add more economic value than they destroy, gross of fees, which is largely driven by large funds.
Practical implications
Market-tracking passive indexes are the most reliable choice for investors who want to maximise their risk-adjusted returns at the lowest possible cost. However, investors with a high level of risk appetite might prefer small actively managed funds in CEE when market conditions are stable or growing. Investors who are less risk tolerant might prefer large actively managed funds.
Originality/value
This is the first study to shed light on the presence of skill in mutual fund returns in CEE.
Keywords
Acknowledgements
The author wishes to thank Estonian Economic Association, Baltic Economic Association, Kalle Ahi (Tallinn University of Technology), Dr. Karin Jõeveer (Tallinn University of Technology), Prof. Matti Keloharju (Aalto University), Prof. Tom Kirchmaier (London School of Economics and Copenhagen Business School), Dr. Laivi Laidroo (Tallinn University of Technology), Prof. Kadri Männasoo (Tallinn University of Technology), Dr. Lars Christian Ohnemus (Copenhagen Business School), Prof. Karsten Staehr (Bank of Estonia and Tallinn University of Technology), Dr. Anita Suurlaht (Bank of Estonia), Prof. Steen Thomsen (Copenhagen Business School); the participants of departmental seminars at Tallinn University of Technology and Copenhagen Business School (CBS), for providing support, helpful comments and suggestions. Part of this research was conducted while the author was a visiting scholar at CBS.
Funding: This work was supported by the Estonian Ministry of Education and Research, project “Efficiency in the Financial Sector in the Light of a Changing Regulatory Environment”, Grant/Award Number: B57; by the European Regional Development Fund, Tallinn University of Technology ASTRA project, TTÜ Development Program 2016-2022, Grant/Award Number: 2014-2020.4.01.16-0032; by the European Union's Horizon 2020 Research and Innovation Programme, Grant/Award Number: 952574; by the European Economic Area (EEA) Financial Mechanism 2014-2021 Baltic Research Programme, Grant/Award Number: S-BMT-21-8 (LT08-2-LMT-K-01-073); and by the Education and Youth Board of Estonia, Dora Plus Programme, Grant/Award Number: T1.1 and T1.2. This paper represents the work conducted in connection with these grants. The funding providers had no role in the research process from study design to submission.
Declarations of interest: None.
Citation
Tapver, T. (2023), "Luck and skill in the performance of global equity funds in Central and Eastern Europe", Managerial Finance, Vol. 49 No. 4, pp. 597-619. https://doi.org/10.1108/MF-01-2022-0051
Publisher
:Emerald Publishing Limited
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