When investors shop for mutual funds internationally, what variables should they consider as indicators of potential outperformance? In their November 2006 paper entitled “The Determinants of Mutual Fund Performance: A Cross-Country Study”, Miguel Ferreira, Antonio Miguel and Sofia Ramos relate risk-adjusted performance for mutual funds around the world to: (1) fund characteristics such as size, age, fees (initial charges, annual charges, and redemption charges), management structure and management tenure; (2) country variables, such as economic development, financial development and investor protection; and, (3) management geographic familiarity via segmentation into domestic, foreign and global funds. Using a sample of 10,568 open-end actively managed equity funds from 19 countries for the period 1999-2005, they conclude that:
- Average mutual fund alphas are negative in most countries. Overall, the worldwide mutual fund industry appears to underperform the market.
- Large funds tend to outperform small funds, suggesting a benefit from economies of scale.
- Young funds tend to outperform seasoned funds, suggesting that they are more aggressive in seeking investment opportunities.
- Funds with high fees tend to outperform those with low fees, suggesting pay for performance.
- Funds managed by individual managers tend to outperform those managed by teams, perhaps due to lower management costs.
- Funds managed by experienced managers tend to outperform those managed by inexperienced managers, suggesting that experience enables operational efficiency.
- Funds in countries with strong legal institutions tend to outperform.
- Domestic funds located in developed countries with liquid stock markets tend to outperform, suggesting an advantage for local familiarity.
In summary, mutual fund investors venturing into the international arena may want to apply these findings to screen funds according to size, age, fees, management and country.
