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

Radu Burlacu (), Patrice Fontaine () and Sonia Jimenez-Garcès ()
Additional contact information
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

Post-Print from HAL

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.

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 (search for similar items in EconPapers)
Date: 2023
New Economics Papers: this item is included in nep-fmk
Note: View the original document on HAL open archive server: https://hal.science/hal-03884990v1
References: Add references at CitEc
Citations:

Published in Finance, 2023, 44 (2), pp.69-111. ⟨10.3917/fina.pr.016⟩

Downloads: (external link)
https://hal.science/hal-03884990v1/document (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-03884990

DOI: 10.3917/fina.pr.016

Access Statistics for this paper

More papers in Post-Print from HAL
Bibliographic data for series maintained by CCSD ().