There is ample evidence on the performance and persistence of funds (both retail and institutional) that invest in U.S. equities. Instead, we study the returns delivered by: (a) U.S.-registered active retail mutual funds that allow individual U.S. investors to invest in global equities, and (b) active institutional products that allow plan sponsors, endowments, and foundations to invest in global equities(note 1). Our examination is of independent interest for at least two reasons. First, the market we study is large but with almost no large sample direct evidence. Second, it is a common belief that markets outside of the most developed ones are less efficient and, therefore, exploitable by active fund managers. This implies that the search for alpha (by academics and practitioners alike) would be more fruitful in international (ex-U.S.) markets. We bring direct evidence to bear on this issue.
Using factor models that include size, value, and momentum, we find little evidence of superior performance in actively-managed funds. This is true on average and in aggregate ? gross value-weighted alphas are, in fact, negative. The tails contain some large alphas, but here the superior performance appears to come from very few funds. Regardless, simulations suggest that funds in the right tail are largely there due to luck. Finally, there is virtually no evidence of persistence. Thus, the totality of the evidence – average and aggregate alphas, luck versus skill simulations, and the persistence tests – suggests little systematic evidence of skill.
Where does this leave the average investor? All our results are generated using returns that are gross of fees. Expense ratios generally vary between 1% and 2% per year, further eroding any risk-adjusted excess return that an investor might hope for. We cannot and do not claim that an investor should not invest in these funds. Indeed, the diversification benefits offered by these funds may be such that they offset the incremental costs. Our results do suggest, however, that the average investor would be better off diversifying via passive rather than active funds.
Note 1. While our funds are nominally designated for U.S. investors, the results are useful for a broader global audience as these funds can be easily transfigured for non-U.S. sponsors.