María Vargas

The importance of information technologies in the ability of fund managers to time the market

This paper compares the performance results of Spanish mutual fund managers and the market timing results obtained using traditional measures and those obtained using measures that consider time variations in returns and risks by incorporating macroeconomic variables representative of Spanish business cycle. We demonstrate that the incorporation of such variables improves the explanatory power of the different models analysed, thus confirming the existence of a relationship between said variables and expected investment fund returns. We, therefore, emphasise and analyse the importance of using information systems, such as the balanced scorecard, which permit a management in real time of that relationship.

Can We Beat the Market with Beta? An Intuitive Test of the CAPM

ABSTRACT Based on a strict and intuitive methodology, the article proposes an empirical test of the CAPM for the main Spanish market stocks. The idea is to replicate the behaviour of an investor purchasing undervalued shares according to the CAPM in order to beat the market during the following period. Where the investor does not meet his objective, the results are consistent with market efficiency and with the CAPM, as the stocks would quickly adapt to their rational value, according to the model. Otherwise, a strategy to beat the market would have been found, obtaining returns above those expected for a given level of systematic risk. Our results are consistent with market efficiency and with the CAPM. This conclusion is reached in different ways, indicating the robustness of the procedure.

Performance measures: advantages of linear risk penalization

This work corrects the risk quotient penalization carried out by the Sharpe and Treynor ratios, which, assuming normality in returns distribution, are equivalent to classifying the funds according to the probability of their returns being below that of the risk-free asset, without considering the entire distribution of the funds’ returns. Different performance measures are applied to a sample of Spanish investment funds, and it is shown that all the measures lead to similar fund classifications, enabling us to conclude that the measures proposed, though methodologically improving the Sharpe and Treynor ratios, maintain their economic meaning and their financial nature.

Perverse timing or biased coefficients

The aim of this work is to examine the influence of mutual fund flows on market timing models, thus providing unbiased timing coefficients. However, as this control is motivated by the existing relationship between mutual fund flows and market returns, we first analyse this relationship, considering previous and concurrent market returns. However, unlike existing studies, we do not consider future returns, since investors do not observe them when making investment decisions. Thus, we feel it is more appropriate to consider expected market returns. We construct the expected market returns by running an AR model and considering the available public information about the macro-economy. The relationship is analysed under different conditions, considering a variety of different mutual fund flow measures, and considering (or not) the sensitivity of mutual fund flows to positive and negative market returns. We also propose different controls for the traditional timing models, and we further analyse the reverse-causality problem. The study demonstrates, for a sample of equity mutual funds registered for sale in the USA, that the poor market timing performance found in this and other prior studies can be completely attributed to the perverse effect of the fund managers’ liquidity service.

Searching for the most profitable and sustainable investment strategy: evidence from sovereign bond funds

The aim of this study is to provide the sovereign bond fund investor with a guide to finding the most profitable and sustainable investment strategy. For this purpose, a Global Sustainable Competitiveness Index is applied to a sample of 48 funds.We have conducted a best-in-class analysis, and our evidence supports the idea that the best strategy consists of investing in funds representing high GDP-per-capita countries, and registering the best-in-class sustainable performance scores.Additionally, other useful findings are that the screening of the funds is beneficial with respect to sustainable performance, and that there is no strong relationship between sustainability and GDP per capita.

Are traditional timing models well specified

Traditional timing models are affected by several biases, which generate spurious timing and stock-picking coefficients. Academics have appointed different causes as the possible sources of these biases. A negative correlation between timing and stock-picking abilities arises as a consequence of the biases in traditional timing models. This article provides evidence for one bias commonly found in traditional timing models, which is related with options. We focus on this bias in view of the scant attention it has so far received in the literature. We believe one possible cause for this bias is the failure to include the cost of the option implicit in timing activities in the timing models, and on this basis, we opt for a corrected version of the Merton and Henriksson model (1981). This study therefore is a pioneer in the assessment of the magnitude of this bias and in the measurement of the impact of its correction on fund managers’ results. Our results confirm both the existence of the bias and the correction of the problem when the cost of the option is included in timing models. The modified version of the Merton and Henriksson model, unlike the traditional model, reports positive timing and stock-picking coefficients, supporting the good performance by managers.

Portfolio Theory, CAPM and Performance Measures

This chapter is focused on the “Portfolio Theory” created by Markowitz. This theory has the objective of finding the optimum portfolio for investors; that is, that which gives tangency between an indifference curve and the efficient frontier. In this chapter, the mathematics of this model is developed. The CAPM, based on this theory, gives the expected return on an asset depending on the systematic risk of the asset. This model detects underpriced and overpriced assets. The critics expressed against the model and their application possibilities are also analyzed. Finally, the chapter centers on performance measures related to portfolio theory (classic indices, derivative indices and new approaches) and on the performance persistence phenomenon employing the aforementioned indices, including an empirical example.

Correcting the Merton and Henriksson timing model

This article provides evidence of a common bias found in traditional timing models, which is related with a negative correlation between timing and stock-picking abilities resulting in spurious coefficients. We consider as a possible cause for this bias the failure to include in the timing models the cost of the option implied in timing activities, and on this basis we opt for a corrected version of the Merton and Henrikssons model (1981). As far as we know, this correction has not previously been applied. Our results confirm both the existence of this bias and the correction of the problem when the cost of the option is included in timing models.

Do Spanish mutual fund managers use public and private information correctly? Use of information in mutual fund management

In this work, we evaluate the use of public and private information by Spanish fund managers by means of an analysis of their traditional and conditional performance. Furthermore, we repeat this analysis for various fund subsets compiling their different characteristics, which allows us to determine the impact of diverse effects on performance. In addition, we restrict this analysis to the fund subset for which public information variables show a high predictive power. Prior to the model application, we develop an analysis of the integration order of variables and of multi-collinearity to assure models work well.