Does Active Management Pay in Italy? A Study of Mutual Fund Performance in the Period 1989-1999

Mutual funds (in the form of open-end unit trusts) were introduced in the Italian financial system in 1984. In this paper we assessed mutual fund performance in Italy in the decade April 1989-March 1999. We used absolute performance data, portfolio compositions and net inflows data to measure the security selection and market timing skills with different performance measure models such as a linear market model, a multi-factor model, a quadratic model and a conditional model. Overall, the after-cost risk-adjusted extra-performance was not significantly different from zero implying that the information and analysis superiority went to cover mostly costs (mainly management fees and taxes). However, this resulted from two different contributions: security selection and style rotation were able to add value whereas market timing activity had a negative impact on financial performances. Besides, we showed that investing into mutual funds in Italy was a good way to diversify into financial markets according to the modern financial theories.