Market frictions, Investor sophistication and persistence in mutual fund performance

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We develop a BG-type model (an active manager competes against a passive investment) with investors characterized by frictions: search costs and financial constraints

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Market frictions, Investor sophistication and persistence in mutual fund performance

  1. 1. Market Frictions, Investor Sophistication and Persistence in Mutual Fund Performance Ariadna Dumitrescu1 Javier Gil-Bazo2 1Department of Finance ESADE Business School 2Department of Economics and Business University Pompeu Fabra and Barcelona GSE UC3M, March 31, 2014
  2. 2. Motivation “Our system of investor protection is predicated on the notion that investors who are armed with complete and accurate information will be able to look out for their own interests. This concept may be overly optimistic in its assumptions about the financial sophistication of average retail investors.” (Barbara Roper, Consumer Federation of America) Dumitrescu & Gil-Bazo Persistence in Mutual Fund Performance 2 / 34
  3. 3. Motivation Investor protection focused on information disclosure Too optimistic about retail investors’ financial sophistication: Biases (e.g., Barber and Odean, 2000; Bailey, Kumar, and Ng, 2011) Financial illiteracy (e.g., Lusardi and Tufano, 2009; van Rooij et al. 2011) Frictions: search costs, switching costs, information processing costs (Hortaçsu and Syverson, 2004; Brunnermeier and Oehmke, 2009) Some investors more sophisticated than others This paper: Consequences of frictions for equilibrium in the mutual fund market. Dumitrescu & Gil-Bazo Persistence in Mutual Fund Performance 3 / 34
  4. 4. Berk and Green (2004) Berk and Green (BG) (2004): If investors compete for the best mutual funds in a friction-less market with increasing marginal trading costs, all funds should deliver zero net expected risk-adjusted return in equilibrium Dumitrescu & Gil-Bazo Persistence in Mutual Fund Performance 4 / 34
  5. 5. Berk and Green (2004) Berk and Green (BG) (2004): If investors compete for the best mutual funds in a friction-less market with increasing marginal trading costs, all funds should deliver zero net expected risk-adjusted return in equilibrium Empirical evidence favorable to diseconomies of scale hypothesis (Chen et al., 2004; Yan et al., 2008; Turtle and Wang, 2013) Dumitrescu & Gil-Bazo Persistence in Mutual Fund Performance 4 / 34
  6. 6. Berk and Green (2004) Berk and Green (BG) (2004): If investors compete for the best mutual funds in a friction-less market with increasing marginal trading costs, all funds should deliver zero net expected risk-adjusted return in equilibrium Empirical evidence favorable to diseconomies of scale hypothesis (Chen et al., 2004; Yan et al., 2008; Turtle and Wang, 2013) ...but not to BG’s model implications: Average fund earns negative net alpha (e.g., Jensen, 1968; Gruber, 1996; Wermers, 2000) Underperformers persist (Carhart, 1997) and some evidence of short-term persistence in outperformance (Bollen and Busse, 2004) Performance predictable from fees and trading costs (e.g., Gil-Bazo and Ruiz-Verdu, 2009; Edelen, Evans & Kadlec, 2007) Dumitrescu & Gil-Bazo Persistence in Mutual Fund Performance 4 / 34
  7. 7. Berk and Green (2004) Possible explanations: No diseconomies of scale: Reuter and Zitzewitz (2013) Dumitrescu & Gil-Bazo Persistence in Mutual Fund Performance 5 / 34
  8. 8. Berk and Green (2004) Possible explanations: No diseconomies of scale: Reuter and Zitzewitz (2013) Investor irrationality: What type of irrationality? How does it impact fund performance? Dumitrescu & Gil-Bazo Persistence in Mutual Fund Performance 5 / 34
  9. 9. Berk and Green (2004) Possible explanations: No diseconomies of scale: Reuter and Zitzewitz (2013) Investor irrationality: What type of irrationality? How does it impact fund performance? Frictions Dumitrescu & Gil-Bazo Persistence in Mutual Fund Performance 5 / 34
  10. 10. What we do We develop a BG-type model (an active manager competes against a passive investment) with investors characterized by frictions: search costs and financial constraints Dumitrescu & Gil-Bazo Persistence in Mutual Fund Performance 6 / 34
  11. 11. What we do We develop a BG-type model (an active manager competes against a passive investment) with investors characterized by frictions: search costs and financial constraints Findings: Negative expected (net) performance in equilibrium Expected performance increasing in expected managerial skill ⇒ Persistence New prediction: Persistence more prevalent among more visible funds (higher fraction of unsophisticated investors) We then test the model’s new prediction with the data Dumitrescu & Gil-Bazo Persistence in Mutual Fund Performance 6 / 34
  12. 12. Related literature Studies on conditional persistence: Berk and Tonks (2007): Past fund performance affects investor composition: performance more persistent after poor returns Glode et al. (2009): Past market performance affects investor composition: performance more persistent after high market returns Elton, Gruber and Blake (2011): Persistence does not depend on fund size Ferreira et al. (2010): Increasing returns to scale and competition among funds (both at the country level) are associated with less persistence. Dumitrescu & Gil-Bazo Persistence in Mutual Fund Performance 7 / 34
  13. 13. The model Model retains BG’s main features: rationality and diseconomies of scale Frictions: Search costs: Each investor i has a specific search cost γi that reflects her ability to find an alternative investment: an index fund with zero performance i-th investor’s reservation return = −γi Financial constraints: Investor i endowed with m dollars and subject to a liquidity shock with probability γi , expected investment = m (1 − γi ) . We also consider an entry cost, K, borne by new investors Dumitrescu & Gil-Bazo Persistence in Mutual Fund Performance 8 / 34
  14. 14. Timeline Investors enter the fund t − 1 Fund’s return at date t is realized Current Investors decide whether to re-invest or not New Investors decide whether to invest and pay entry cost K t Fund return at date t + 1 is realized t + 1 Dumitrescu & Gil-Bazo Persistence in Mutual Fund Performance 9 / 34
  15. 15. The model 0 γSup Dumitrescu & Gil-Bazo Persistence in Mutual Fund Performance 10 / 34
  16. 16. The model 0 γMAX γSup Dumitrescu & Gil-Bazo Persistence in Mutual Fund Performance 11 / 34
  17. 17. The model 0 γ γMAX γSup Dumitrescu & Gil-Bazo Persistence in Mutual Fund Performance 12 / 34
  18. 18. The model: Equilibrium Equilibrium: an amount of assets q∗ t+1 and the associated expected risk-adjusted net return, TPt+1 q∗ t+1 = φt+1 − C q∗ t+1 q∗ t+1 − f, such that: All current investors that (re)invest in the fund have reservation returns lower than TPt+1 q∗ t+1 All new investors that invest in the fund have reservation returns lower than TPt+1 q∗ t+1 − K Holding f constant, depending on φt+1: (i) nobody invests; (ii) some current investors reinvest; (iii) all current but no new investors invest; (iv) new investors invest; (v) all target investors invest Dumitrescu & Gil-Bazo Persistence in Mutual Fund Performance 13 / 34
  19. 19. The model: Equilibrium 0 γ γ∗ γMAX γSup γ∗ = γC obtained from TPt+1 qC t+1 = −γC Dumitrescu & Gil-Bazo Persistence in Mutual Fund Performance 14 / 34
  20. 20. The model: Equilibrium 0 γ∗ γ γMAX γSup γ∗ = γN obtained from TPt+1 qN t+1 − K = −γN Dumitrescu & Gil-Bazo Persistence in Mutual Fund Performance 15 / 34
  21. 21. Proposition 1: Expected net performance Dumitrescu & Gil-Bazo Persistence in Mutual Fund Performance 16 / 34
  22. 22. Proposition 2: Comparative statics, K = 0 Dumitrescu & Gil-Bazo Persistence in Mutual Fund Performance 17 / 34
  23. 23. Proposition 2: Comparative statics, K > 0 Dumitrescu & Gil-Bazo Persistence in Mutual Fund Performance 18 / 34
  24. 24. Endogenous Fee When the manager chooses f to maximize fq∗ t+1(f): f increases with φ, Dumitrescu & Gil-Bazo Persistence in Mutual Fund Performance 19 / 34
  25. 25. Endogenous Fee When the manager chooses f to maximize fq∗ t+1(f): f increases with φ, however, f increases less that one-to-one with φ, so TP still increasing in phi, Dumitrescu & Gil-Bazo Persistence in Mutual Fund Performance 19 / 34
  26. 26. Endogenous Fee When the manager chooses f to maximize fq∗ t+1(f): f increases with φ, however, f increases less that one-to-one with φ, so TP still increasing in phi, except when there is no entry of investors Dumitrescu & Gil-Bazo Persistence in Mutual Fund Performance 19 / 34
  27. 27. Testing the Model Difficult to base our test on investor sophistication Dumitrescu & Gil-Bazo Persistence in Mutual Fund Performance 20 / 34
  28. 28. Testing the Model Difficult to base our test on investor sophistication Instead, test the prediction that performance of high-visibility funds more sensitive to managerial skill Dumitrescu & Gil-Bazo Persistence in Mutual Fund Performance 20 / 34
  29. 29. Testing the Model Difficult to base our test on investor sophistication Instead, test the prediction that performance of high-visibility funds more sensitive to managerial skill Since managerial skill persistent (by definition?), performance of high-visibility funds Dumitrescu & Gil-Bazo Persistence in Mutual Fund Performance 20 / 34
  30. 30. Testing the Model Difficult to base our test on investor sophistication Instead, test the prediction that performance of high-visibility funds more sensitive to managerial skill Since managerial skill persistent (by definition?), performance of high-visibility funds should persist longer Unexpected result! Dumitrescu & Gil-Bazo Persistence in Mutual Fund Performance 20 / 34
  31. 31. Testing the Model Difficult to base our test on investor sophistication Instead, test the prediction that performance of high-visibility funds more sensitive to managerial skill Since managerial skill persistent (by definition?), performance of high-visibility funds should persist longer Unexpected result! Test: regress future performance on past performance, compare coefficient between high- and low-visibility funds Dumitrescu & Gil-Bazo Persistence in Mutual Fund Performance 20 / 34
  32. 32. Empirical Strategy We construct a panel of monthly risk-adjusted portfolio alphas using Carhart’s (1997) model: rit = αi + βrm,i rmt + βsmb,i smbt + βhml,i hmlt + βpr1y,i pr1yt + εit Compute past and future 12-month alphas and estimate by pooled OLS: ˆαi,t:t+11 = θ0,t + θ1 ˆαi,t−12:t−1 + θ2 ˆαi,t−12:t−1LOi,t−1 + θ3 ˆαi,t−12:t−1HIi,t−1 + +θ4LOi,t−1 + θ5HIi,t−1 + ΘXi,t−1 + εi,t:t+11, LO, HI, dummy variables for low- and high-visibility funds, respectively We are interested in θ2 and θ3 Dumitrescu & Gil-Bazo Persistence in Mutual Fund Performance 21 / 34
  33. 33. Empirical strategy Proxies for fund visibility: 1 Number of different investment categories in which the family offers mutual funds; 2 Family size, as proxied by the natural logarithm of total family assets; 3 Family age, computed as the age of the oldest fund in the family; 4 Average advertising expenditure over the previous 12 months For each one of these proxies: define LO (bottom 25%) and HI (top 25%) dummies Dumitrescu & Gil-Bazo Persistence in Mutual Fund Performance 22 / 34
  34. 34. Data CRSP MFDB, July ’11 version, 1993-2010 Advertising data from Kantar Media, 1995-2009 We aggregate class-level monthly observations at the portfolio level Data: TNA; return; investment category; exp. ratio; 12b-1 fee; front-end load; back-end load We exclude index, non-domestic, non-diversified, non-equity funds Portfolios and fund families identified by CRSP or name We exclude funds with TNA<$15M and age<3yr Average: 1,251 funds and 327 families (m.co.) Fee and return data winsorized at 1% of each tail each month Dumitrescu & Gil-Bazo Persistence in Mutual Fund Performance 23 / 34
  35. 35. Summary Statistics 1993-2000 variable Obs. mean sd p25 p50 p75 Total net assets 84287 1333.59 4040.44 93.31 278.9 921.88 Annual flow (in %) 63369 12.24 63.35 -11.43 -0.02 18.18 Age 84144 15.13 14.82 5.42 9.08 17.5 Family total net assets 26998 10981.68 40743.85 228.6 1428.47 5611.1 Family age 26987 25.86 20.68 9.67 16.25 40.5 Front-end load (in %) 37433 3.36 1.96 1.73 3.76 4.75 Back-end load (in %) 28188 1.43 1.37 0.32 1 2.17 Management fee (in %) 37991 0.74 0.24 0.6 0.75 0.9 Expense ratio (in %) 71040 1.21 0.39 0.94 1.16 1.44 12b-1 fee (in %) 22914 0.33 0.25 0.12 0.25 0.5 Turnover ratio (in %) 70452 82.28 64.63 36.2 67 109 Return (in %) 83929 15.17 66.71 -22.03 17.44 51.83 Carhart’s 4-factor alpha (in %) 51181 -0.41 26.99 -13.38 -0.73 11.96 Dumitrescu & Gil-Bazo Persistence in Mutual Fund Performance 24 / 34
  36. 36. Summary Statistics 2001-2010 variable Obs. mean sd p25 p50 p75 Total net assets 186114 1256.74 4946.26 80 242.7 838.8 Annual flow (in %) 145663 6.31 58.90 -15.26 -4.73 11.26 Age 185881 14.10 12.87 6.5 10.17 16.08 Family total net assets 43703 20925.18 91580.15 201.1 1265.4 7738.7 Family age 43703 28.74 21.84 12.58 20.67 38.58 Front-end load (in %) 97186 2.62 1.73 1.09 2.65 4.00 Back-end load (in %) 75535 0.76 0.89 0.10 0.43 1.09 Management fee (in %) 171168 0.72 0.25 0.59 0.75 0.89 Expense ratio (in %) 170249 1.23 0.38 0.99 1.21 1.47 12b-1 fee (in %) 127940 0.29 0.23 0.09 0.25 0.44 Turnover ratio (in %) 173993 82.15 64.48 35 66 110 Return (in %) 185859 4.56 65.30 -29.18 11.98 45.30 Carhart’s 4-factor alpha (in %) 130793 -2.17 21.14 -12.01 -1.99 7.86 Dumitrescu & Gil-Bazo Persistence in Mutual Fund Performance 25 / 34
  37. 37. Performance persistence and fund visibility #Inv Cat Family Size Family Age Family Adv. α 0.071*** 0.085*** 0.088*** 0.090*** 0.113*** size -0.003*** -0.003*** -0.003*** -0.002*** -0.002*** flow -0.005** -0.005** -0.005** -0.004** -0.004** age 0.000 0.000 0.000 0.000 0.001 fam_size 0.001** 0.001** 0.003*** 0.001** 0.001 fam_age -0.000 -0.000 -0.000 -0.001 -0.001 F-load 0.021 0.026 0.021 0.024 0.032 B-load -0.329*** -0.317*** -0.335*** -0.328*** -0.315*** exp -0.619** -0.615** -0.554** -0.637** -0.551* turnover -0.003* -0.003* -0.003* -0.003* -0.003 α x LO -0.076** -0.059* -0.078*** -0.052** α x HI -0.015 -0.018 -0.021 -0.048 LO 0.003 0.006** -0.003 -0.005*** HI 0.001 -0.004* -0.001 -0.001 Time Fixed Effects Yes Yes Yes Yes Yes Observations 108,524 108,524 108,524 108,524 101,098 Adjusted R-squared 0.074 0.075 0.075 0.074 0.076 Dumitrescu & Gil-Bazo Persistence in Mutual Fund Performance 26 / 34
  38. 38. Endogeneity issues Fund visibility not exogenous Dumitrescu & Gil-Bazo Persistence in Mutual Fund Performance 27 / 34
  39. 39. Endogeneity issues Fund visibility not exogenous So what? Reverse causality: persistence ⇒ visibility? Third variable causes both persistence and visibility Dumitrescu & Gil-Bazo Persistence in Mutual Fund Performance 27 / 34
  40. 40. Endogeneity issues Fund visibility not exogenous So what? Reverse causality: persistence ⇒ visibility? Third variable causes both persistence and visibility More on this later... Dumitrescu & Gil-Bazo Persistence in Mutual Fund Performance 27 / 34
  41. 41. Role of fund size and investment categories #Inv Cat Family Size Family Age Family Adv. α 0.171*** 0.186*** 0.181*** 0.185*** 0.221*** size -0.003*** -0.003*** -0.003*** -0.003*** -0.002*** flow -0.005** -0.005** -0.005** -0.005** -0.004** age 0.001 0.001 0.001 0.001 0.001 fam_size 0.001*** 0.002*** 0.003*** 0.001*** 0.001* fam_age -0.000 -0.000 -0.000 -0.000 -0.001 F-load 0.025 0.029 0.026 0.027 0.036 B-load -0.339*** -0.328*** -0.349*** -0.340*** -0.324*** exp -0.622** -0.618** -0.552** -0.626** -0.567** turnover -0.002 -0.002 -0.002 -0.002 -0.001 α x LO -0.096*** -0.089*** -0.088*** -0.058** α x HI 0.005 0.019 -0.004 -0.028 LO 0.002 0.005* -0.003 -0.006*** HI 0.000 -0.003 -0.001 -0.001 α x size -0.003 -0.008 -0.016* -0.007 -0.005 Time Fixed Effects Yes Yes Yes Yes Yes Inv. Cat. Fixed Effects Yes Yes Yes Yes Yes Inv. Cat. Interactions Yes Yes Yes Yes Yes Observations 108,524 108,524 108,524 108,524 101,098 Adjusted R-squared 0.090 0.091 0.091 0.091 0.094 Dumitrescu & Gil-Bazo Persistence in Mutual Fund Performance 28 / 34
  42. 42. Performance persistence among winners and losers To distinguish between persistence in poor and good performance, we estimate: ˆαi,t:t+11 = δ0,t + n δ1,ndec_ni,t−1 + n δ2,ndec_ni,t−1LOi,t−1 + n δ3,ndec_ni,t−1HIi,t−1 +δ4LOi,t−1 + δ5HIi,t−1 + ∆Xi,t−1 + ξi,t:t+11, where dec_ni,t−1 = 1 if fund i’s past performance in n − th decile (1st=bottom, 10th=top) We consider n = 1, 2, 3, 8, 9, 10 Dumitrescu & Gil-Bazo Persistence in Mutual Fund Performance 29 / 34
  43. 43. Performance persistence among winners and losers #Inv Cat Family Size Family Age Family Adv. dec_1(α)(bottom) -0.008*** -0.012*** -0.010*** -0.009*** -0.009* dec_2(α) -0.004*** -0.005*** -0.003* -0.005** -0.006* dec_3(α) -0.003*** -0.003*** -0.003** -0.003*** -0.001 dec_8(α) 0.003*** 0.003** 0.003** 0.003** 0.001 dec_9(α) 0.006*** 0.006*** 0.008*** 0.007*** 0.008*** dec_10(α)(top) 0.010*** 0.014*** 0.015*** 0.014*** 0.020*** dec_1(α) x LO 0.012** 0.010** 0.009* 0.000 dec_2(α) x LO 0.003 -0.000 0.002 0.003 dec_3(α) x LO 0.006*** 0.003 0.007** -0.001 dec_1(α) x HI 0.006 -0.003 -0.001 0.017** dec_2(α) x HI 0.002 -0.003 0.001 -0.002 dec_3(α) x HI -0.001 -0.001 -0.001 -0.003 dec_8(α) x LO -0.004* -0.004* -0.004 0.001 dec_9(α) x LO -0.001 -0.004 -0.004 -0.003 dec_10(α) x LO -0.016*** -0.014*** -0.011** -0.013** dec_8(α) x HI 0.003 0.001 0.002 0.011** dec_9(α) x HI 0.003 -0.004 -0.000 0.004 dec_10(α) x HI -0.005 -0.008 -0.007 -0.001 LO 0.004* 0.008*** -0.002 -0.003* HI -0.000 -0.002 -0.001 -0.002 Time Fixed Effects Yes Yes Yes Yes Yes Controls Yes Yes Yes Yes Yes Observations 108,524 108,524 108,524 108,524 101,098 Adjusted R-squared 0.076 0.077 0.078 0.077 0.079 Dumitrescu & Gil-Bazo Persistence in Mutual Fund Performance 30 / 34
  44. 44. Ranking on returns #Inv Cat Family Size Family Age Family Adv. dec_1(ret)(bottom) -0.009*** -0.013*** -0.012*** -0.012*** -0.009 dec_2(ret) -0.004*** -0.006*** -0.007*** -0.004** -0.004 dec_3(ret) -0.003** -0.004** -0.003** -0.003* 0.000 dec_8(ret) 0.000 -0.000 -0.001 0.001 0.002 dec_9(ret) 0.002 0.001 0.002 0.003 0.007* dec_10(ret)(top) 0.003 0.003 0.003 0.005 0.006 dec_1(ret) x LO 0.012*** 0.010** 0.012*** -0.001 dec_2(ret) x LO 0.009*** 0.008** 0.005* -0.000 dec_3(ret) x LO 0.005 0.003 0.005* -0.003 dec_1(ret) x HI 0.011** 0.001 0.003 -0.002 dec_2(ret) x HI 0.003 0.003 -0.004 -0.001 dec_3(ret) x HI 0.002 0.001 -0.003 -0.001 dec_8(ret) x LO 0.000 0.002 -0.001 -0.002 dec_9(ret) x LO 0.000 0.002 -0.003 -0.006 dec_10(ret) x LO -0.002 0.001 -0.002 -0.004 dec_8(ret) x HI 0.002 0.002 -0.003 -0.003 dec_9(ret) x HI 0.002 -0.004 -0.003 -0.004 dec_10(ret) x HI 0.002 -0.003 -0.004 -0.000 LO 0.001 0.004 -0.003 -0.003 HI -0.001 -0.004* 0.000 0.001 Time Fixed Effects Yes Yes Yes Yes Yes Controls Yes Yes Yes Yes Yes Observations 108,524 108,524 108,524 108,524 101,098 Adjusted R-squared 0.073 0.074 0.074 0.074 0.075 Dumitrescu & Gil-Bazo Persistence in Mutual Fund Performance 31 / 34
  45. 45. Retail funds only #Inv Cat Family Size Family Age Family Adv. dec_1(α)(bottom) -0.011*** -0.012*** -0.017*** -0.012** -0.009 dec_2(α) -0.006*** -0.007*** -0.006** -0.008*** -0.008 dec_3(α) -0.003** -0.004** -0.003* -0.005** -0.000 dec_8(α) 0.003** 0.005** 0.004 0.004** -0.002 dec_9(α) 0.006*** 0.005* 0.007** 0.007*** 0.004 dec_10(α)(top) 0.010*** 0.012** 0.015*** 0.012*** 0.018** dec_1(α) x LO 0.013** 0.017*** 0.015* -0.001 dec_2(α) x LO 0.004 0.001 0.008* 0.004 dec_3(α) x LO 0.006** 0.002 0.008* -0.002 dec_1(α) x HI -0.015* 0.002 -0.007 -0.003 dec_2(α) x HI -0.004 -0.004 0.002 -0.014 dec_3(α) x HI -0.002 -0.001 0.001 -0.005 dec_8(α) x LO -0.005* -0.005 -0.003 0.005 dec_9(α) x LO 0.001 -0.002 -0.003 0.001 dec_10(α) x LO -0.013** -0.014** -0.008 -0.010 dec_8(α) x HI -0.000 0.002 -0.001 0.018*** dec_9(α) x HI 0.002 -0.003 -0.001 0.008 dec_10(α) x HI 0.007 -0.003 -0.004 0.014 LO 0.006** 0.005 -0.001 -0.000 HI 0.001 -0.001 0.006** -0.002 Time Fixed Effects Yes Yes Yes Yes Yes Controls Yes Yes Yes Yes Yes Observations 55,214 55,214 55,214 55,214 48,643 Adjusted R-squared 0.068 0.071 0.070 0.070 0.069 Dumitrescu & Gil-Bazo Persistence in Mutual Fund Performance 32 / 34
  46. 46. Conclusions Interaction of market frictions can generate both negative and positive expected performance in equilibrium as well as cross-sectional differences in performance Dumitrescu & Gil-Bazo Persistence in Mutual Fund Performance 33 / 34
  47. 47. Conclusions Interaction of market frictions can generate both negative and positive expected performance in equilibrium as well as cross-sectional differences in performance Less visible funds exhibit a substantially lower degree of persistence in performance Dumitrescu & Gil-Bazo Persistence in Mutual Fund Performance 33 / 34
  48. 48. Conclusions Interaction of market frictions can generate both negative and positive expected performance in equilibrium as well as cross-sectional differences in performance Less visible funds exhibit a substantially lower degree of persistence in performance However, more visible funds’ performance does not persist more Dumitrescu & Gil-Bazo Persistence in Mutual Fund Performance 33 / 34
  49. 49. Conclusions Interaction of market frictions can generate both negative and positive expected performance in equilibrium as well as cross-sectional differences in performance Less visible funds exhibit a substantially lower degree of persistence in performance However, more visible funds’ performance does not persist more Institutional investors not necessarily more sophisticated (James and Karceski, 2006; Phillips et al., 2012)) Dumitrescu & Gil-Bazo Persistence in Mutual Fund Performance 33 / 34
  50. 50. Conclusions Interaction of market frictions can generate both negative and positive expected performance in equilibrium as well as cross-sectional differences in performance Less visible funds exhibit a substantially lower degree of persistence in performance However, more visible funds’ performance does not persist more Institutional investors not necessarily more sophisticated (James and Karceski, 2006; Phillips et al., 2012)) More information disclosure should be accompanied by policies: (i) aimed at reducing participation costs and (2) especially targeted to the least sophisticated investors Dumitrescu & Gil-Bazo Persistence in Mutual Fund Performance 33 / 34
  51. 51. To-do list Competition among two active funds: Cournot-type duopoly Exogenous source of variation in visibility: “Star” in the family Non-performance related news about family/fund Merger into a larger fund/family Any ideas? Dumitrescu & Gil-Bazo Persistence in Mutual Fund Performance 34 / 34

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