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On management risk and price in the mutual fund industry: style and performance distribution analysis

Author

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  • Juan Carlos Matallín-Sáez

    (Universitat Jaume I)

  • Amparo Soler-Domínguez

    (Universitat Jaume I)

  • Diego Víctor Mingo-López

    (Universitat Jaume I)

Abstract

This study shows how investing in mutual funds involves an additional risk, which we call management risk as a consequence of the uncertainty in the results of active management. To address this issue, we analyze a sample of 2539 US equity mutual funds. For comparative purposes, we differentiate among index funds and actively managed mutual funds with different investment styles. We observe that performance distribution shows negative mean, negative skewness, and excess kurtosis. Results also show that management risk is not rewarded with higher abnormal performance. Moreover, higher active management prices are linked to funds with higher management risk and negative asymmetry. Therefore, investors seem to be risk-seeking since they are paying more to participate in high asymmetric bets. Finally, we attempt to solve this puzzle from the behavioral finance perspective.

Suggested Citation

  • Juan Carlos Matallín-Sáez & Amparo Soler-Domínguez & Diego Víctor Mingo-López, 2021. "On management risk and price in the mutual fund industry: style and performance distribution analysis," Risk Management, Palgrave Macmillan, vol. 23(1), pages 150-171, June.
    • Handle: RePEc:pal:risman:v:23:y:2021:i:1:d:10.1057_s41283-021-00072-9
    DOI: 10.1057/s41283-021-00072-9
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    More about this item

    Keywords

    Mutual funds; Management risk; Performance; Fees; Behavioral finance;
    All these keywords.

    JEL classification:

    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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