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Article
Publication date: 1 September 2002

Don U.A. Galagedera and Param Silvapulle

Outlines previous research on measuring the performance of investment funds, suggesting that data envelopment analysis (DEA) techniques can overcome some of the problems…

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2158

Abstract

Outlines previous research on measuring the performance of investment funds, suggesting that data envelopment analysis (DEA) techniques can overcome some of the problems of the capital asset pricing model and give pointers for improvement. Uses DEA to assess the relative performance of 257 Australian mutual funds 1995‐1999 and logistic regression to investigate the characteristics which affect it. Describes the methodology and presents the results, which suggest that scale efficiency is the main source of overall technical efficiency and that both are higher for risk‐averse funds with high positive net asset flows. Explains the ASSIRT rating system for managed funds and finds the ratings strongly associated with DEA relative efficiency scores. Believes the findings are useful to analysts, investors and managers.

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Managerial Finance, vol. 28 no. 9
Type: Research Article
ISSN: 0307-4358

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The Efficiency of Mutual Fund Families
Type: Book
ISBN: 978-1-78743-799-9

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Article
Publication date: 14 March 2016

Michael Devaney, Thibaut Morillon and William Weber

The purpose of this paper is to estimate the performance of 188 mutual funds relative to the risk/return frontier accounting for the transaction costs of producing a…

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1479

Abstract

Purpose

The purpose of this paper is to estimate the performance of 188 mutual funds relative to the risk/return frontier accounting for the transaction costs of producing a portfolio of investments.

Design/methodology/approach

The directional output distance function is used to estimate mutual fund performance. The method allows the data to define a frontier of return and risk accounting for the transaction costs associated with securities management and production of risky returns. Proxies for the transaction costs of producing a portfolio of securities include the turnover ratio, load, expense ratio, and net asset value. The estimates of mutual fund performance are bootstrapped to account for the unknown data generating process. By comparing each mutual fund’s performance relative to the capital market line the authors determine how the fund should adjust their portfolio in regard to risk and return in order to maximize the inefficiency adjusted Sharpe ratio.

Findings

The bootstrapped estimates indicate that the average mutual fund could simultaneously expand return and contract risk by 3.2 percent if it were to operate on the efficient frontier. After projecting each mutual fund’s return and risk to the efficient frontier the authors find that a majority of the mutual funds should reduce risk to be consistent with the capital market line.

Originality/value

Many researchers have used data envelopment analysis to estimate a piecewise linear frontier of risk and return to measure mutual fund performance. To the authors’ knowledge the research is the first to use a twice-differentiable quadratic directional distance function to measure the managerial performance and risk/return tradeoff of mutual funds.

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Managerial Finance, vol. 42 no. 3
Type: Research Article
ISSN: 0307-4358

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Article
Publication date: 28 October 2008

Hossein Varamini and Svetlana Kalash

The main purpose of this study is to use the Sharpe Ratio to test the efficient market hypothesis for different market capitalization and investment styles of mutual funds

Abstract

The main purpose of this study is to use the Sharpe Ratio to test the efficient market hypothesis for different market capitalization and investment styles of mutual funds. The results of the study for the entire period of 1994‐2007 as well as the two subperiods (1994‐1999 and 2000‐2007) indicate that small cap funds have provided the highest risk‐adjusted return for the entire period whereas growth funds have exhibited lower returns. The findings, therefore, suggest that the mutual funds market is not always efficient, which makes it possible for an investor or a mutual fund manager to earn excess return on a risk‐adjusted basis.

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American Journal of Business, vol. 23 no. 2
Type: Research Article
ISSN: 1935-5181

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Book part
Publication date: 19 April 2018

Carlos Sánchez-González

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The Efficiency of Mutual Fund Families
Type: Book
ISBN: 978-1-78743-799-9

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Book part
Publication date: 19 April 2018

Carlos Sánchez-González

Abstract

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The Efficiency of Mutual Fund Families
Type: Book
ISBN: 978-1-78743-799-9

Abstract

Details

The Efficiency of Mutual Fund Families
Type: Book
ISBN: 978-1-78743-799-9

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Book part
Publication date: 25 February 2016

Jana Hili, Desmond Pace and Simon Grima

The uncertainty as to whether investments in riskier and less efficient markets allow managers to ‘beat the market’ remains a question to which answers are required…

Abstract

Purpose

The uncertainty as to whether investments in riskier and less efficient markets allow managers to ‘beat the market’ remains a question to which answers are required. Accordingly, the purpose of this chapter is to offer new insights on portfolios of the US, European and Emerging Market (‘EM’) domiciled equity mutual funds whose objectives are the investment in emerging economies, and specifically analyses two main issues: alpha generation and the influence of the funds’ characteristics on their risk-adjusted performance.

Methodology/approach

The dataset is made up a survivorship-bias controlled sample of 137 equity funds over the period January 2004 to December 2014, which are then grouped into equally weighted portfolios according to the scheme’s origin. The Jensen’s (1968) Single-Factor model along with the Fama and French’s (1993) and Carhart’s (1997) multifactor models are employed to authenticate results and answer both research questions.

Findings

Research analysis reveals that EM exposed fund managers fail to collectively outperform the market. It thereby offers ground to believe that the emerging world is very close to being efficient, proving that the Efficient Market Hypothesis (‘EMH’) ideal exists in this scenario where market inefficiency might only be a perception of market participants as any apparent opportunity to achieve above-average returns is speedily snapped up by very active managers. Overall these managers take a conservative approach to portfolio construction, whereby they are more unperturbed investing in large cap equity funds so as to lessen somewhat the exposure towards risks associated with liquidity, stability and volatility.

Furthermore, the findings show that large-sized equity portfolios have the lead over the medium and small-sized competitors, whilst the high cost and mature collective investment vehicles enjoy an alpha which although is negative is superior to their peers. The riskiest funds generated the lowest alpha, and thereby produced doubts as to whether investors should accept a higher risk for the hope of earning higher returns, at least when aiming to gain an exposure into the emerging world.

Originality/value

Mutual fund performance is not an innovative topic so to speak. Nonetheless, researchers and academia have centred their efforts on appraising the behaviour of fund managers domiciled primarily in developed and more efficient economics, leaving the emerging region highly uncovered in this respect. This study, therefore aims at crafting meaningful contributions to the literature as well as to the practical perspective.

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Contemporary Issues in Bank Financial Management
Type: Book
ISBN: 978-1-78635-000-8

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Article
Publication date: 12 November 2018

Ann-Ngoc Nguyen, Muhammad Sadiq Shahid and David Kernohan

The purpose of this paper is to investigate the impact of investor confidence on mutual fund performance in two relatively vulnerable but leading emerging markets, India…

Abstract

Purpose

The purpose of this paper is to investigate the impact of investor confidence on mutual fund performance in two relatively vulnerable but leading emerging markets, India and Pakistan.

Design/methodology/approach

A pooled ordinary least squared (OLS) model is used to look at two alternative measures of investor confidence and test for the relationship between investor confidence and mutual fund returns. To check the robustness of the findings, the authors also implement two-stage least squares and generalized method of moments techniques to control for unobserved heterogeneity, simultaneity and dynamic endogeneity problems in the regressors.

Findings

The paper finds that the returns of mutual funds are positively associated with investor confidence and an interaction effect exists between investor confidence and persistence in performance. The paper also confirms that returns from mutual funds are associated with different fund characteristics such as fund size, turnover, expense, liquidity, performance persistence and the fund’s age. These findings remain robust to alternative model specifications and measures of investor confidence.

Originality/value

While the previous literature mainly focuses on mutual fund characteristics and the macroeconomic determinants of mutual fund returns, this paper demonstrates that investor confidence plays an important role in determining mutual fund performance. The authors attribute this finding to two relatively unique features of the emerging markets in the study. A lack of awareness of mutual funds as being a low-cost investment vehicle and the interplay of cultural and behavioral changes have prevented investor’s savings from being channeled into investment products, away from gold or property.

Details

Journal of Economic Studies, vol. 45 no. 6
Type: Research Article
ISSN: 0144-3585

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Article
Publication date: 14 November 2016

Yen Hoang Bui, Delpachitra Sarath and Abdullahi D. Ahmed

The purpose of this paper is to measure efficiency of superannuation funds using data envelopment analysis (DEA), using data related to financial performance of…

Abstract

Purpose

The purpose of this paper is to measure efficiency of superannuation funds using data envelopment analysis (DEA), using data related to financial performance of superannuation funds. The sample comprises 183 superannuation funds covering approximately 79 per cent of the 231 largest Australian Prudential Regulation Authority (APRA)-regulated funds in 2012. The research covers a period of seven years from 2005 to 2012. The results indicate that most Australian superannuation funds are inefficient relative to the benchmark efficiency frontier based on efficient funds. The findings emphasise the importance of improving the efficiency of Australian superannuation funds by reducing overall fund expenses to narrow the gap in performance between efficient and inefficient funds.

Design/methodology/approach

This study aims to contribute to policy, theory and practice in several dimensions. Member protection and the efficiency of the superannuation system are topical issues (Donald, 2009). Despite its importance from a regulatory point of view, efficiency has only been discussed in relation to operational issues such as managing agency relationships, fees and charges, investment return or economies of scale. The relative efficiency of the Australian superannuation system from an economic productivity perspective has rarely been examined, except for a study by Njie (2006), where the Malmquist productivity DEA technique was used to measure the efficiency of Australia’s retirement income system.

Findings

Most inefficient funds had very low efficiency scores and were fell into the lower quintiles such as Quintiles 4 (scored 0.200-0.399) and 5 (scored 0.001-0.199). Consequently, input reduction targets were significantly higher for these two quintiles. Similarly, input reduction targets were high under the period DEA estimates. In order to be comparatively efficient, Quintile 4 funds were required to reduce total expenses by 75 per cent (−0.754) and volatility of return by 80 per cent (−0.801). Similarly, Quintile 5 funds needed to reduce total expenses by, on average, 83 per cent (−0.824) and volatility of return by 89 per cent (−0.894).

Research limitations/implications

As in other empirical research, this study also depended heavily on the data collected from the secondary sources such as APRA database and other financial reports. The issues of measurement errors in data sources such as APRA database are well documented (see, e.g. Cummins, 2012). This issue needs the attention of future research on the efficiency of superannuation funds.

Practical implications

The findings on individual year DEA estimates indicate that most funds were inefficient due to high expenses. Therefore, mandatory disclosure of fees and charges in a comparable manner may be necessary to justify fee payments and to address transparency and accountability issues, which are critical issues identified by the Cooper Review and the academic literature (Australian Government, 2014; Cooper et al., 2010; Gallery and Gallery, 2006).

Social implications

The issue of Australian superannuation funds concentrating the majority of fund assets in highly volatile investment vehicles such as the share markets has been in the spotlight in the aftermath of the global financial crisis. There have been proposals to better diversify superannuation assets in other asset classes (Cooper et al., 2010).

Originality/value

This study contributes to the current literature on superannuation funds by investigating efficiency. As efficiency studies using DEA have not been conducted on the Australian superannuation industry, this study also contributes to the academic literature on DEA and its extensive applications to various economic sectors. Efficiency scores using DEA, ranking, trends and shifts in the efficiency frontiers could be obtained for Australian superannuation funds on an on-going or annual basis.

Details

Journal of Economic Studies, vol. 43 no. 6
Type: Research Article
ISSN: 0144-3585

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