Skill, Scale and Investor Return in Established and Emerging Markets - An empirical study of equity mutual fund performance between markets with contrasting characteristics

Abstract: In this report we empirically analyze the effects of returns to scale for equity mutual funds in the Nordic and Asian regions. We also investigate whether or not funds generate alpha (i.e., have skill). This is achieved by first estimating each market’s alphas with two different sets of risk adjustment factors over a rolling window. Then, a series of panel regressions are performed using both gross returns and alphas as dependent variables, that take into account time- and fund-fixed effects, as well as fund characteristics. Our tests find only indirect evidence that funds do generate positive alphas and thus have skill in both regions, but we cannot conclude the robustness of these results. We observe that fund skill has increased in the market over the years, contrary to fund performance which has had a declining path. We also find that increasing fund and industry size are detrimental to a fund’s performance and its return to investors. Finally, we find suggestive evidence that Asian funds exhibit better performance than Nordic funds, which can be explained by decreasing returns to scale at the fund and industry level.