Mutual Fund Performance: An Empirical Decomposition into Stock-Picking Talent, Style, Transactions Costs, and Expenses

Do Private Equity Fund Managers Earn Their Fees? Compensation, Ownership, and Cash Flow Performance

We examine subjective risk premia implied by return expectations of individual investors and professionals for aggregate portfolios of stocks, bonds, currencies, and commodity futures. While in-sample predictive regressions with realized excess returns suggest that objective risk premia vary countercyclically with business cycle variables and aggregate asset valuation measures, we find subjective risk premia extracted from survey data do not comove much with these variables. This lack of cyclicality of subjective risk premia is a pervasive property that holds in expectations of different groups of market participants and in different asset classes. A similar lack of cyclicality appears in out-ofsample forecasts of excess returns, which suggests that investors’ learning of forecasting relationships in real time may explain much of the cyclicality gap. These findings cast doubt on models that explain time-varying objective risk premia inferred from in-sample regressions with countercyclical variation in perceived risk or risk aversion. We further find a link between subjective perceptions of risk and subjective risk premia, which points toward a positive risk-return tradeoff in subjective beliefs. We are grateful for comments and suggestions to Ching-Tse Chen, Ken French, Niels Gormsen, Ian Martin, Monika Piazzesi, seminar participants at Boston College, University of Utah, and conference participants at NBER Behavioral Finance Meeting. University of Chicago, Booth School of Business, 5807 South Woodlawn Avenue, Chicago, IL 60637, e-mail: stefan.nagel@chicagobooth.edu City University of Hong Kong, Department of Economics and Finance, 83 Tat Chee Avenue, Kowloon, Hong Kong, e-mail: zhengyxu@cityu.edu.hk

/pdf/dynamics-of-subjective-risk-premia-2puwfdj5.pdf

Dynamics of Subjective Risk Premia

Asset prices reflect investors' subjective beliefs about future cash flows and prices. In this chapter, we review recent research on the formation of these beliefs and their role in asset pricing. Return expectations of individual and professional investors in surveys differ markedly from those implied by rational expectations models. Variation in subjective expectations of future cash flows and price levels appear to account for much of aggregate stock market volatility. Mapping the survey evidence into agent expectations in asset pricing models is complicated by measurement errors and belief heterogeneity. Recent efforts to build asset pricing models that match the survey evidence on subjective belief dynamics include various forms of learning about payout or price dynamics, extrapolative expectations, and diagnostic expectations. Challenges for future research include the exploration of subjective risk perceptions, aggregation of measured beliefs, and links between asset market expectations and the macroeconomy. 

Expectations data in asset pricing

/pdf/dynamics-of-subjective-risk-premia-v5dsorbb.pdf

The largest asset managers in the world report their expectations publicly in so-called capital market assumptions We collect these expectations and revisit the relationship between equity premium expectations and equity valuation ratios Asset managers' equity premium expectations are high when valuations are low and low when valuations are high (countercyclical), and the term structure of equity premium expectations is downward sloping when valuations are low and upward sloping when valuations are high (procyclical) Studying mutual funds that invest in both equities and bonds, we find that the sensitivity of portfolios to expectations is large on average and even larger for funds that are less constrained by their investment mandates Overall, the results support rational expectations asset pricing models

Return Expectations and Portfolios: Evidence from Large Asset Managers

I collect a registry-based dataset on the personal portfolios of Swedish mutual fund managers. The managers who invest (a lot of) personal money in their own funds generate positive abnormal returns. Some managers are betting on their best ideas by investing personal money in individual securities that are simultaneously held by their funds. The majority do not invest in their funds nor in their funds' constituents, and hold more cash and more passive funds in their personal portfolios. Overall, the results suggest that fund managers are highly certain about their ability---or more often lack thereof---and invest their personal wealth accordingly.

https://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID3280604_code2215455.pdf?abstractid=3068656&mirid=1

What Do Mutual Fund Managers' Private Portfolios Tell Us About Their Skills?

Firm fundamentals, in particular firm size, help explain variation in factor loadings (betas) for the market, size and value factor. Surprisingly, however, they are dominated in terms of explanatory power by an unobserved time-invariant component. This leads to surprisingly stable factor loadings: stocks with high (low) factor loadings tend to remain as such for over a decade. Our models work best in explaining market betas (r-squares up to 64%) and worst in explaining value betas (r-squares up to 35%). These results are robust to different estimation techniques of factor betas and also hold up when we limit the sample to firms with statistically significant betas.

Firm Fundamentals and Realized Factor Betas

We recover a forward-looking distribution of expected abnormal returns (alphas) for active equity mutual funds from analyst ratings. Professional analysts believe that alphas are dispersed, that the average fund will underperform, and that the largest funds will outperform. We estimate a rational expectations learning model of fund performance and confront the model-implied expectations based on fund size, perceived skill, and fees with analysts' expectations. Analysts and the rational learner respond similarly to changes in perceived skill and fees, but in contrast to the rational learner, analysts do not believe in a negative impact of fund size on fund returns. The absence of such decreasing returns to scale in analysts' expectations and the presence thereof in actual fund returns make it difficult to reconcile analysts' expectations with rational expectations, but can help explain the size of the industry together with its poor performance.

Expectations of Active Mutual Fund Performance

Between March and September 2020, broad equity price indexes around the world experienced a historic rally. Although this rally followed a significant decline in stock prices, it appears difficult to explain due to continuing concerns about the global pandemic and national economies running far below their potentials.

The Stock Market–Real Economy "Disconnect": A Closer Look

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