Issues in funds management: Australian evidence

This dissertation presents five empirical research essays that all revolve around a common theme –the evaluation of managed fund performance. A number of important issues within the Australian managed fund investment industry are examined such as: the relationship between fund flows and excess share market returns; economic and overall efficiency; relative performance in both a deterministic and stochastic setting; the value of ratings to individual and institutional investors; investment style; and fund misclassification. Each essay in this dissertation provides original research of investment performance issues and measurement across different asset class sectors and covering different sample periods between January 1990 and December 2009. The first essay extends our understanding of two important issues within the Australian fund management industry at the macro-level, namely association and causality between aggregate managed fund flows and excess share market returns. It contributes to the literature by confirming that Granger-Causality exists between equity managed fund flows and share market returns and additionally that excess share market returns are an indication of future fund flows. Evidence is provided in the second essay making use of data envelopment analysis (DEA) to support the claim that inefficient funds with high Morningstar ratings (more than one star) are downgraded and that efficient funds with low Morningstar ratings (fewer than five stars) are upgraded in subsequent periods. This provides confidence in the ratings provided in the market for many Australian managed funds and hence supports the use of ratings by individual investors in the construction of their portfolios. The third essay extends the work presented in the second by constructing efficiency measures making use of a formulated stochastic data envelopment analysis (SDEA) model to better capture the uncertainty associated with investment markets. The significance of the findings presented in this essay includes the introduction to portfolio performance evaluation: a new tool for evaluating fund performance (namely, the efficiency rating). The contribution made in the fourth essay is that the two-step process negates the problem of spurious regression, in contrast to existing literature. In the final essay it is demonstrated that no association exists between misclassification and Australian managed fund performance for Australian multi-sector managed funds. The relationships empirically identified in this study assist market participants and enable them to make more informed decisions regarding when to buy and sell securities. Additionally policy makers could look at further ways of monitoring performance and providing additional tools (like efficiency measures) that individual investors can easily understand. The primary aim of the thesis is to contribute to the understanding of managed fund performance. The results provide new evidence, in addition to confirmatory evidence, in relation to a number of issues.