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The Japanese Open-End Fund Puzzle

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  • Brown, Stephen J
  • Goetzmann, William N
  • Hiraki, Takato
  • Otsuki, Toshiyuki
  • Shiraishi, Noriyoshi

Abstract

Over the past 2 decades, Japanese mutual funds have consistently and dramatically underperformed risk-adjusted benchmarks. In this article, we examine manager style, tax dilution, and manager inefficiency as three potential explanations for this puzzle. Grouping funds by style of asset management, we find evidence that confirms Cai, Chan, and Yamada's (1997) conjecture that tax dilution contributes significantly to underperformance. We propose a simple instrument to control for this dilution effect. Using this instrument, we find that alphas of Japanese funds are statistically indistinguishable from zero for most types of funds over the period 1982-95. Copyright 2001 by University of Chicago Press.

Suggested Citation

  • Brown, Stephen J & Goetzmann, William N & Hiraki, Takato & Otsuki, Toshiyuki & Shiraishi, Noriyoshi, 2001. "The Japanese Open-End Fund Puzzle," The Journal of Business, University of Chicago Press, vol. 74(1), pages 59-77, January.
    • Handle: RePEc:ucp:jnlbus:v:74:y:2001:i:1:p:59-77
    DOI: 10.1086/209663
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    Cited by:

    1. Stephen Brown & William Goetzmann & Takato Hiraki & Noriyoshi Shiraishi & Masahiro Watanabe, 2002. "Investor Sentiment in Japanese and U.S. Daily Mutual Fund Flows," Yale School of Management Working Papers ysm274, Yale School of Management, revised 01 Apr 2008.
    2. Engstrom, Stefan, 2003. "Costly information, diversification and international mutual fund performance," Pacific-Basin Finance Journal, Elsevier, vol. 11(4), pages 463-482, September.
    3. Kee-Hong Bae & Junesuh Yi, 2008. "The Impact of the Short-Short Rule Repeal on the Timing Ability of Mutual Funds," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 35(7-8), pages 969-997.
    4. Anchada Charoenrook & Pantisa Pavabutr, 2017. "A Window into Thai Mutual Fund Managers’ Perception and Decision-Making Process," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 20(03), pages 1-43, September.
    5. Brown, Stephen J. & Goetzmann, William N. & Hiraki, Takato & Shiraishi, Noriyoshi, 2003. "An analysis of the relative performance of Japanese and foreign money management," Pacific-Basin Finance Journal, Elsevier, vol. 11(4), pages 393-412, September.
    6. Hiraki, Takato & Ito, Akitoshi, 2009. "Investor biases in Japan: Another pathology of Keiretsu," Pacific-Basin Finance Journal, Elsevier, vol. 17(1), pages 100-124, January.
    7. Oh, Natalie Y. & Parwada, Jerry T., 2007. "Relations between mutual fund flows and stock market returns in Korea," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 17(2), pages 140-151, April.
    8. Alexakis, Christos & Dasilas, Apostolos & Grose, Chris, 2013. "Asymmetric dynamic relations between stock prices and mutual fund units in Japan. An application of hidden cointegration technique," International Review of Financial Analysis, Elsevier, vol. 28(C), pages 1-8.
    9. Capocci, Daniel & Hubner, Georges, 2004. "Analysis of hedge fund performance," Journal of Empirical Finance, Elsevier, vol. 11(1), pages 55-89, January.
    10. Cha, Heung-Joo & Kim, Jaebeom, 2010. "Stock returns and investment trust flows in the Japanese financial market: A system approach," Journal of Asian Economics, Elsevier, vol. 21(4), pages 327-332, August.
    11. Tanaka, Hiroatsu & Baba, Naohiko, 2004. "Optimal Timing in Trading Japanese Equity Mutual Funds: Theory and Evidence," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 22(1), pages 91-121, March.
    12. Khorana, Ajay & Servaes, Henri & Tufano, Peter, 2005. "Explaining the size of the mutual fund industry around the world," Journal of Financial Economics, Elsevier, vol. 78(1), pages 145-185, October.

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