The Long-Run Performance of German Stock Mutual Funds

Download or read book The Long-Run Performance of German Stock Mutual Funds written by Olaf Grewe and published by . This book was released on 2004 with total page 32 pages. Available in PDF, EPUB and Kindle. Book excerpt: We examine the risk-adjusted performance of open-end mutual funds which invest mainly in German stocks. After briefly discussing the institutional environment in which these funds operate, we focus on the benchmark problem and the risk adjustment problem. Our data set includes all German funds sold to the public in 1972, our performance analysis covers the time period 1973 to 1998. In our empirical analysis, we first look at the rates of return of individual funds and at the unweighted average rates of return of all funds in our sample. When we apply the Sharpe and Jensen measure to the latter time series in the traditional way, the funds underperform the appropriate benchmarks by approximately 1.5% per year, which is significant both from the statistical and the economic perspective. Applying the Sharpe and the Jensen measure in the traditional way creates a bias from the perspective of long-term investors, because the analysis is based on the arithmetic, not the geometric mean return. To avoid this bias we look, in a second step, at the returns of investors who risk adjust their fund investments ex-ante by borrowing or lending with the objective, that the future risk of his levered portfolio matches that of the chosen benchmark. When we again apply the Sharpe and the Jensen measure to the unweighted average rates of return, the underperformance is reduced by 40%. For large funds, on the average, the underperformance is less than for small funds. When we look at the value-weighted means of individual fund returns, the underperformance nearly disappears.