The performance of individual US and UK mutual funds has been extensively
analysed across a range of research.
On balance, studies find relatively weak evidence of positive alpha performance
in the extreme right tail of the cross-section performance distribution and
relatively strong evidence of negative alpha performance throughout the left
tail. Evidence for successful market timing in both parametric and
non-parametric studies has also been found.
Many newspapers and trade journals present performance results in the form of
league tables, so they too emphasise funds in the tails of the cross-section
distribution. This gives rise to two major problems.
First, because this relates to ordered funds the performance distribution for a
particular percentile fund (e.g. the best, 2nd best, etc) differs from that of
the parent distribution (e.g. normally distributed) - this is the theory of
Second, if the performance statistic for different funds have unknown and
different underlying distributions then the performance distribution of
particular percentile fund has to be obtained empirically.
The contribution of this paper is to derive the empirical distributions for
individual funds in the tails of the performance distribution, for a large
number of German equity mutual funds using 20 years (1990-2009) of monthly
It was found that when using gross returns and the Fama-French three factor
(3F) model, the number of statistically significant positive-alpha funds is
zero but increases markedly when market timing variables are added.
However, when using a 'total performance' measure, the number of statistically
significant winner funds falls to zero.
The message for German investors is clear - avoid active equity mutual funds
and diversify using index tracker funds or ETFs.
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