Returns from investing in equity mutual funds 1971 to 1991
Burton G. Malkiel JOF 1995
Introduction
❖ Early 1970s, EMH accepted ❖ By the early 1980s, several cracks: returns
❖ The numbers of positive alpha and negative alpha are approximately equal.
❖ Table 3
❖ Grossman and Stiglitz(1980): positive alphas for pre-expense returns confirm that mutual funds do earn gross returns to cover expenses
❖ High returns: the funds failed have been dropped out of the sample
❖ Tendency of more successful funds to survive, overstated.
❖ “incubator” funds ❖ Funds quity
❖ Hot hand: mutual funds that achieved above average returns continue to enjoy superior performance.
❖ Expense ratios will also influence
❖ Analyze the predictability of performance by two-way tables showing successful performance over successive periods.
❖ The 1980s: small stocks tended to underperform the S&P stock index.
❖ 10-year sample limited
❖ There is relationship between returns and betas in mutual funds. The betas are stable
Weaker during the 1980s
4 simulations of strategies based on the persistence
❖ Whether the persistence of performance is economically significant.
expenses ❖ conclude
1 Survivorship bias and the data set employed
❖ Today’s investors are not interested in the funds that no longer exist, which creates the biases in the figures.
funds sold to the public. ❖ Quarterly total returns.
Some survivorship in table 1
The differences is big
2. A closer look at performance
❖ The t is only -0.21, so it is indistinguishable from 0. even surviving funds do not produce excess returns for investors after expenses.
❖ Over 20 year period 1971 to 1991, the relationships between betas and total returns disappear.
3. The “Hot Hand” Phenomenon: the persistence of mutual fund returns
❖ hot hand phenomenon
❖ Section 1: data ❖ Section 2: performance of the equity mutual
funds ❖ Section 3: hot hand phenomenon ❖ Section 4: simulate investment strategies ❖ Section 5: relation between returns and
❖ Jensen(1968): performance of mutual funds was inferior to randomly selected portfolios with equivalent risk
❖ Henriksson(1984): fund managers have enough private information to offset expenses.
❖ But positive alphas are small and insignificant. EGDH(1993): inappropriate benchmarks, if corrects for the non-S&P stocks, the positive alphas disappear.
are not independent and correlated over time. The predictability of returns ❖ Most efficiency test are joint tests ❖ Eugene Fama:”Sequels are rarely as good as the originals.”