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Why do investors buy shares of actively managed equity mutual funds? Considering the Correct Reference Portfolio from an Uninformed Investor's Perspective 1, 2

Author

Listed:
  • Radu Burlacu

    (CERAG - Centre d'études et de recherches appliquées à la gestion - UGA - Université Grenoble Alpes)

  • Patrice Fontaine

    (EUROFIDAI - Institut Européen de données financières - ESSEC Business School - CNRS - Centre National de la Recherche Scientifique)

  • Sonia Jimenez-Garcès

    (CERAG - Centre d'études et de recherches appliquées à la gestion - UGA - Université Grenoble Alpes)

Abstract

We use the Grossman & Stiglitz (1980) framework to build a reference portfolio for uninformed investors and employ this portfolio to assess the performance of actively managed equity mutual funds. We propose an empirical methodology to construct this reference portfolio using the information on prices and supply. We show that mutual funds provide, on average, an insignificant alpha of 23 basis points per year when considering this portfolio as a reference. With the stock market index as a proxy for the market portfolio, the average fund alpha is negative and highly significant, −128 basis points per year. The results are robust when considering various subsets of funds based on their characteristics and their degree of selectivity. In line with rational expectations equilibrium models considering asymmetrically informed investors and partially revealing equilibrium prices, our study supports that active management adds value for uniformed investors.

Suggested Citation

  • Radu Burlacu & Patrice Fontaine & Sonia Jimenez-Garcès, 2023. "Why do investors buy shares of actively managed equity mutual funds? Considering the Correct Reference Portfolio from an Uninformed Investor's Perspective 1, 2," Post-Print hal-03884990, HAL.
    • Handle: RePEc:hal:journl:hal-03884990
    DOI: 10.3917/fina.pr.016
    Note: View the original document on HAL open archive server: https://hal.science/hal-03884990
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    Keywords

    JEL Classification: G11 G12 G14 information asymmetry reference portfolio performance actively managed equity mutual funds rational expectations equilibrium models; JEL Classification: G11; G12; G14 information asymmetry; reference portfolio; performance; actively managed equity mutual funds; rational expectations equilibrium models;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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