How To Stop COVID-19 From Derailing Your Retirement
Justin Kuepper
|
Let’s take a look at a few key pieces of advice to stop...
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Benchmarking the active funds’ returns against the new Fama-French five-factor model (which adds profitability and investment to beta, size and value), Meyer-Brauns found an average negative monthly alpha of -0.06 % (with a t-statistic, a measure of statistical significance, of 2.3). He also found that about 2.4 % of the active funds had alpha t-statistics of 2 or greater, which is slightly less than what we would expect from chance (2.9 %).
He concluded: “There is strong evidence that the vast majority of active managers are unable to produce excess returns that cover their costs.” He added that “funds do about as well as would be expected from extremely lucky funds in a zero-alpha world. This means that ex-ante, investors could not have expected any outperformance from these top performers.”
Meyer-Brauns’ findings are consistent with the overwhelming evidence that, when it comes to active managers, past performance is not predictive of future results. For example, studies on Morningstar’s star rating system have found that, while the lowest-ranked mutual funds continue to underperform (partly because they have high expense ratios) and remain at only one star, five-star funds don’t continue to outperform and their future returns are not statistically different than lower-ranked three- and four-star funds. Despite compelling evidence that the star rating system has no predictive value, it still exists as a measure of mutual fund ability, and mutual fund flows are strongly impacted by changes in the ratings — upgrades lead to strong inflows and downgrades to large outflows.
There’s very little evidence that upside and downside capture ratios predict future fund performance.
Despite the inability of the upside and downside capture ratios to explain future mutual fund performance, Morningstar continues to provide them to investors, and there’s a significant association with both ratios and subsequent fund flows. Specifically, Marlo and Stark found a stronger response to the upside capture ratio if the current market state is up, and a stronger response to the downside capture ratio if the current market state is down.
Sadly, many investors are engaged in what Albert Einstein described as the definition of insanity: doing the same thing over and over again and expecting a different outcome. But, now that you have the evidence, hopefully you’ll avoid this mistake.
Receive email updates about best performers, news, CE accredited webcasts and more.
Justin Kuepper
|
Let’s take a look at a few key pieces of advice to stop...
News
Iuri Struta
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Most equities have continued their rally these past two weeks, along with investment-grade...
Aaron Levitt
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While tax-gains harvesting takes some planning to implement, it can help save investors...
Find out why $30 trillon is invested in mutual funds.
Download our free report
Find out why $30 trillon is invested in mutual funds.
Download our free report
Find out why $30 trillon is invested in mutual funds.
Mutual Fund Education
Justin Kuepper
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Let's take a closer look at how ESG investments have outperformed during the...
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Daniel Cross
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While CITs and mutual funds share many similarities, there are some key differences...
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Sam Bourgi
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The phrase ‘bear market’ has been thrown around a lot lately, but it...
Benchmarking the active funds’ returns against the new Fama-French five-factor model (which adds profitability and investment to beta, size and value), Meyer-Brauns found an average negative monthly alpha of -0.06 % (with a t-statistic, a measure of statistical significance, of 2.3). He also found that about 2.4 % of the active funds had alpha t-statistics of 2 or greater, which is slightly less than what we would expect from chance (2.9 %).
He concluded: “There is strong evidence that the vast majority of active managers are unable to produce excess returns that cover their costs.” He added that “funds do about as well as would be expected from extremely lucky funds in a zero-alpha world. This means that ex-ante, investors could not have expected any outperformance from these top performers.”
Meyer-Brauns’ findings are consistent with the overwhelming evidence that, when it comes to active managers, past performance is not predictive of future results. For example, studies on Morningstar’s star rating system have found that, while the lowest-ranked mutual funds continue to underperform (partly because they have high expense ratios) and remain at only one star, five-star funds don’t continue to outperform and their future returns are not statistically different than lower-ranked three- and four-star funds. Despite compelling evidence that the star rating system has no predictive value, it still exists as a measure of mutual fund ability, and mutual fund flows are strongly impacted by changes in the ratings — upgrades lead to strong inflows and downgrades to large outflows.
There’s very little evidence that upside and downside capture ratios predict future fund performance.
Despite the inability of the upside and downside capture ratios to explain future mutual fund performance, Morningstar continues to provide them to investors, and there’s a significant association with both ratios and subsequent fund flows. Specifically, Marlo and Stark found a stronger response to the upside capture ratio if the current market state is up, and a stronger response to the downside capture ratio if the current market state is down.
Sadly, many investors are engaged in what Albert Einstein described as the definition of insanity: doing the same thing over and over again and expecting a different outcome. But, now that you have the evidence, hopefully you’ll avoid this mistake.
Receive email updates about best performers, news, CE accredited webcasts and more.
Justin Kuepper
|
Let’s take a look at a few key pieces of advice to stop...
News
Iuri Struta
|
Most equities have continued their rally these past two weeks, along with investment-grade...
Aaron Levitt
|
While tax-gains harvesting takes some planning to implement, it can help save investors...
Find out why $30 trillon is invested in mutual funds.
Download our free report
Find out why $30 trillon is invested in mutual funds.
Download our free report
Find out why $30 trillon is invested in mutual funds.
Mutual Fund Education
Justin Kuepper
|
Let's take a closer look at how ESG investments have outperformed during the...
Mutual Fund Education
Daniel Cross
|
While CITs and mutual funds share many similarities, there are some key differences...
Mutual Fund Education
Sam Bourgi
|
The phrase ‘bear market’ has been thrown around a lot lately, but it...