Performance of Mutual Funds

The explosion of mutual funds around the globe gives us a clear message of how important is the role of professional money managers in financial markets. Across the world, there are recognizable mutual fund styles that seek to fulfil the needs of investors. From this perspective, the study of the styles of investing could reveal some interesting idiosyncrasies that make, at least in some cases, the mutual fund industry significantly country-specific. Recent evidence suggests that behind an investment strategy there is a latent philosophy featuring the market in which money managers operate. An intuition that seems coherent with the view of Barberis and Shleifer (2003) and Chan et al. (2005), for which managers offer their financial products with the objective of meeting the preferences of their clients. Starting from this intuition, Savona (2006) explored the Italian mutual funds market, proving that dissimilarities between domestic and foreign funds operating in Italy were induced by different dominant styles: the first appeared to be globally focused on a constant bond-liquidity strategy, while the second showed dramatic shift from bonds to equities in the period 1998–2002.

Since its introduction by Charnes et al. (1978), researchers have welcomed data envelopment analysis (DEA) as a methodology for performance evaluation (Gregoriou and Zhu, 2005). DEA utilizes linear programming and optimization to appraise the relative efficiencies and inefficiencies of peer decision units (mutual funds in this case), and provides different units of measure using multiple inputs and outputs by generating a “best practices frontier”. DEA can ameliorate the performance of existing inefficient mutual funds by diminishing input or increasing output levels.

A number of researchers, such as Hendricks et al. (1993), found evidence of mutual funds performance persistence. Non-US funds, however, have remained the subject of relatively little research. Our study concentrates on all-equity domestic funds for sale in Ireland. The performance of the Irish managed funds industry is of interest because, while the size of the Irish funds under management is relatively small, the Dublin financial centre presents an extraordinarily high concentration of fund management activities and know-how, and it is very well integrated in international financial markets. The interesting question is, then, whether portfolio managers operating in this favourable environment (in terms of ease of access to information and availability of skilled professionals) show persistently superior performance in managing domestic funds.

This article describes the German fund industry. We provide an overview of its historical development, its market structure and the products offered in the German fund market today, as well as a description of the legal framework. We focus mainly on traditional funds available to retail investors (Publikumsfonds), comparable to US open-ended mutual funds.