Abstract:
Mutual funds are unmatched by most other investment products in terms of assets under management and popularity. Academics have long addressed the question whether there is more behind the glossy brochures with eye-glazing graphs and tables. But much of the evidence in the finance literature suggests that most actively managed funds are not able to provide added value. Successful funds might beat their competition but very few beat the market (Fisher, 2014), and those that do tend to be rather lucky than truly skilled. Proponents of the efficient market hypothesis understand this as a natural consequence of correctly priced assets. By argumentum e contrario active investing should hence be more beneficial in markets that are perceived to be less efficient. In chapter 1 I show that funds predominantly investing in emerging market equities generate higher reward-to-risk ratios compared to their benchmarks. Adjusted for common stock factors, emerging market funds outperform before costs, but not after expenses. Local funds seem to have an edge over their foreign counterparts, outperforming them by approximately 1.8% annually. Chapter 2 examines late trading in mutual fund shares in European markets. This practice was common and widespread in the US until 2003, but it is startling to find evidence of this in the most recent past. Even more so after the European watchdog completed an investigation in 2004 reassuring that there are no indications with respect to late trading in their member states. I find that late trading accounts for up to 10% of daily flow. In chapter 3 I propose a flow-based explanation for two long-standing empirical regularities in finance – the Sell in May and the January effect. Flow exhibits a strong winter-summer seasonal that is consistent with both anomalies. After controlling for flow, there is no seasonality left in stock returns. Both of these effects appear to be mainly driven by retail money flow.