Int. Fin. Markets, Inst.

and Money 35 (2015) 116131

Contents lists available at ScienceDirect

Journal of International Financial

Markets, Institutions & Money
journal homepage: www.elsevier.com/locate/intfin

The performance of diversied emerging market equity funds

Anup K. Basu , Jason Huang-Jones
School of Economics and Finance, Queensland University of Technology, Brisbane, QLD 4001, Australia

a r t i c l e

i n f o

Article history:
Received 9 August 2014
Accepted 21 January 2015
Available online 30 January 2015
Keywords:
Emerging market
Diversied equity funds
Fund manager performance
Market timing
Persistence

a b s t r a c t
We investigate the performance of globally diversied emerging market equity funds during the rst decade of the twenty-rst century. A vast majority of these funds do not
outperform the market benchmark even before transaction costs. The systematic risk of
most of the funds is similar to that of the market benchmark portfolio, which may suggest
that they aim to offer diversication benets rather than seeking superior risk-adjusted
returns through active management. We do not nd any evidence of market timing ability
amongst these funds. Finally, whilst we detect persistence in performance, this result is
driven mainly by the poorly performing funds.
2015 Elsevier B.V. All rights reserved.

1. Introduction
Investing in emerging markets has been a major trend amongst investors well over last two decades. Emerging markets
reportedly offer investors in developed nations the potential of higher returns as well as risk reduction benets through
portfolio diversication (see for example, Ratner and Leal, 2005).1 For investors in developed markets, mutual funds have
been one of the most important vehicles for investing in emerging markets. Most of these funds are open-end equity
funds (Kaminsky et al., 2001). In this paper, we investigate the performance of globally diversied emerging market equity
funds between 2000 and 2010. Specically, we aim to address two important questions related to diversied emerging
market equity funds. First, do these funds produce superior risk-adjusted returns? Second, is there any persistence in the
performance of these funds?
Traditionally mutual funds have provided a low cost route to portfolio diversication. However, with the spectacular
growth of exchange-traded-funds (ETFs) in recent years, investors now have an alternative vehicle to construct a low cost,
well-diversied portfolio. One important rationale for choosing to invest in traditional mutual funds over ETFs can be the
expectation of abnormal returns resulting from the perceived informational advantages or superior skills of fund managers.
Hence it is important to evaluate whether these funds deliver any (ex-post) positive abnormal performance. Second, from the
investors perspective, it is important to examine whether there is any evidence of persistence in the performance of these
funds. If there is predictability in performance of funds, investors may (ex-ante) reallocate their savings towards winner
funds and enhance abnormal returns (Cuthbertson et al., 2008).
There has been a plethora of empirical research on performance of mutual funds in United States (US), United Kingdom
(UK) and other developed markets. Overall, the evidence does not appear supportive of the claim of any superior performance.

Corresponding author. Tel.: +61 0732194596.

E-mail addresses: a.basu@qut.edu.au (A.K. Basu), jason.huangjones@qut.edu.au (J. Huang-Jones).
1
The diversication benets, arguably, have been less visible in recent years due to nancial liberalization and integration of international markets. For
example, Charitou et al. (2006) nd no signicant international diversication benets in the post 1993 period.
http://dx.doi.org/10.1016/j.intn.2015.01.002
1042-4431/ 2015 Elsevier B.V. All rights reserved.

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117

There is limited evidence on persistence with most studies nding the phenomenon to be more concentrated amongst the
underperforming funds. These ndings are generally consistent with the efcient market paradigm according to which
asset prices quickly assimilate all available information thereby making it impossible for any investor or group of investors
to systematically outperform the market on a risk-adjusted basis.
Yet whether the evidence gathered on fund performance from developed markets applies to emerging market funds
remains an open question. It is a commonly held notion that many of the emerging markets have weaker regulatory environment relative to developed markets and lack informational efciency due to poor information disclosure requirements
in emerging markets. If true, this may imply more opportunities for emerging market funds to exploit these inefciencies and
deliver abnormal returns. On the other hand, even if inefciencies exist in these markets, the cost of collecting rm-specic
information could be sufciently high to negate any attempt by funds to deliver superior returns (Chan and Hameed, 2006).2
Despite the growth in diversied emerging markets funds, empirical studies on their performance have been rather
scarce. Past research conducted on performance of emerging market funds has focused on country specic (like Russia,
Poland, India, Malaysia, etc.) or region specic (like Africa or Latin America) funds. Ours is amongst only a handful of studies
to analyze the performance of emerging market funds that are diversied across multiple markets. The sample period of
most of the past studies do not extend beyond 2006 and hence they are almost a decade old. The exception is Eling and
Faust (2010) whose sample period extends to August 2008 but their study has an important shortcoming due to its choice of
inappropriate benchmark (S&P 500) in evaluating performance of emerging market funds. Our study analyzes more recent
data (20002010) to investigate the performance of these funds at an aggregate as well as individual level. To our knowledge,
ours is the rst study to analyze the performance of emerging market equity funds since the onset of global nancial crisis
(GFC). We nd evidence that is different from some of the earlier ndings on performance of emerging market funds on
several counts. Our study reveals greater underperformance amongst emerging market funds compared to Eling and Faust
(2010). In contrast to Huij and Post (2011), we show that the persistence in performance is mainly attributable to the
underperforming funds as in developed markets. Also, we nd the abnormal returns spread between the best and the worst
performing funds to be much smaller than what they estimate.
The remainder of the paper is organized as follows. Section 2 briey reviews the literature on mutual fund performance
in developed and emerging markets. Section 3 describes our data and methodology used in this study. Section 4 presents
the empirical results and Section 5 concludes.
2. Literature review
2.1. Mutual fund performance in developed markets
There is a long history of research in mutual fund performance in the US starting with Jensen (1968) who samples 115
open-end mutual funds over a 20-year period (19451964). Using the single factor capital asset pricing model (CAPM), he
reports an average excess performance (alpha) of 0.4% and 1.1% gross and net of expenses respectively, which implies that
on average, the funds earned approximately 1.1% less per year than the benchmark index (S&P 500) on a risk adjusted basis.
The results also nd very little evidence of an individual funds ability to outperform the market, except by mere chance. Of
the 115 funds, only 3 funds show signicantly positive alphas.
Ippolito (1989) conducts a similar study of 143 mutual funds over a different 20-year sample period (19651984). Unlike
Jensen (1968), he nds an average alpha of 0.81% for the sample. However, only 12 out of the 143 funds show signicantly
positive alphas. The author concludes that net of fees and expenses (excluding load fees), funds are able to outperform the
benchmark by a margin that is large enough to cover their load charges. However, Elton et al. (1993) take issue with Ippolitos
benchmark and contest the authors results. After considering the mutual funds holding of non-S&P stocks, they nd the
average alpha to be 1.49% with not a single fund producing signicantly positive alpha.
Grinblatt and Titman (1989) compare gross and net returns of US mutual funds using a single factor model over the
19751985 period across four sets of benchmarks. For gross returns, the funds outperform two indexes by 1.8% and 2.28%
per annum and underperform the other two indexes by 2.31% and 2.64%. However, outperformance diminishes when net
returns are used with no statistically signicant alphas against any of the indexes.
Malkiel (1995) employs the CAPM model to evaluate performance of 239 mutual funds in US between 1971 and 1991
and nds that these funds signicantly underperform the index both before and after expenses. The reported average alphas
for gross and net returns are 2.03% and 3.20% per annum respectively. As a result, he concludes that investors are better
off by investing in the market index rather than by investing with active managers. Unlike Grinblatt and Titman (1989) who
claim that the impact of survivorship bias is modest, Malkiel nds that the potential upward bias in the estimated alpha due
to non-inclusion of non-surviving funds in the sample is quite severe.
Gruber (1996) employs both CAPM and a multifactor model with the inclusion of small minus big (SMB) and high minus
low (HML) factors and also a bond index. The funds in his study underperform by 1.56% and 0.65% p.a. against the single and

2
Empirical evidence on the issue of efciency in emerging markets is divided. Many studies suggest inefciency or a lower level of efciency in emerging
markets compared to developed markets (see for example, Fillis, 2006; Mobarek et al., 2008; Risso, 2009) whilst others contradict this claim (see, for
example, Karamera et al., 1999; Grifn et al., 2010). However, there is agreement on the heterogeneous levels in efciency across these markets.

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the multifactor model respectively. He also estimates the potential bias of performance measurements when non-surviving
funds are not included in the sample. The non-surviving funds underperform the benchmark by 4.2% and 2.75% per annum
against the single and multifactor index respectively.
Daniel et al. (1997) use benchmarks based on characteristics of stocks to evaluate whether active mutual funds outperform passive strategies. They investigate a database of stock holdings covering 2500 equity funds between 1975 and 1994.
Their results show that whilst the average fund outperforms the passive strategies, the magnitude of the outperformance
(approximately 100 basis points) barely outweighs the costs in the form of higher management fees. Kothari and Warner
(2001) also analyze simulated funds based on characteristics that mimic actual funds. They conclude that past studies of
mutual fund performance are prone to underestimate abnormal performance by a large magnitude, particularly if a funds
style characteristics differ from those of the value-weighted market portfolio.
Mutual fund performance has also been researched in other developed markets outside the US. Cumby and Glen (1990)
examine 15 internationally diversied mutual funds with Morgan Stanley World Index as the benchmark. The authors
nd no evidence of fund mangers outperforming the relevant benchmark. The average alpha of the funds in their study is
reported to be is 2.28% p.a. using net returns. Only 3 individual funds show postive alpha but none of these are statistically
signicant. Cai et al. (1997) investigate the performance of 64 Japanese mutual funds over a 10-year period (19811992).
They nd the alphas for the funds to be consistently negative. The alphas using the CAPM model vary between 6.01%
and 7.33% per annum whilst the alphas for the Fama and French three factor (3F) model range from 5.53% to 6.19%.
Blake and Timmermann (1998) study 2300 UK mutual funds between 1972 and 1995 with the funds sub-divided into four
categories: growth, general, income and small companies. Their results show negative alphas across all fund categories and
estimated to be about 1.8% p.a. Cesari and Panetta (2002) examines Italian mutual funds and nds positive alpha even after
accounting for their non-equity investments.3 However, Matallin-Saez (2006) reports an average alpha of 1.2% amongst
Spanish mutual funds using CAPM. The alphas from other multifactor measures are substantially lower but the estimates
are not statistically signicant.
One of the few studies that nd mutual funds outperform benchmark net of expenses is Otten and Bams (2002), who
examine the performance of 506 mutual funds in various European countries including France, Germany, Italy, Netherlands
and the UK from 1991 to 1998. They employ Carhart (1997) four factor model and report positive alphas for funds in all
countries except Germany. However, only UK funds signicantly outperform benchmark by 1.33% per year after expenses.
Their ndings contradict those of Blake and Timmermann (1998) who do not account for the momentum factor, the main
driver for fund performance in Otten and Bams study.
2.2. Performance of funds in emerging markets
Empirical research studies conducted on the performance of emerging market fund managers have been mainly country
specic. For example, Lai and Lau (2010) examine performance of 311 mutual funds in Malaysia and nd the average returns
to be superior against market benchmark, particularly during bull markets. Sehgal and Jhanwar (2008) investigate 60 growth
and growth income mutual funds in India and nd about 25% of the sample exhibit signicantly positive alphas. Swinkels
and Rzezniczak (2009) explore security selection and market timing ability for Polish mutual funds. Their results indicate
selection skills but negative market timing ability.
Amongst a handful of studies that investigate funds investing in multiple emerging markets (rather than specic
countries), Abel and Fletcher (2004) analyze the performance of UK-based unit trusts with emerging market equity investments. They do not nd any evidence of superior performance. Gottesman and Morey (2007) examine the performance
of diversied emerging market equity funds over three consecutive periods: 19972000, 20002003 and 20032005. The
authors nd some support for the claim that actively managed funds generally underperform passive benchmarks with the
proportion of funds with negative alphas ranging from 45.03% to 80.90% for the different sample periods. Michelson et al.
(2008) examine the performance of 55 diversied emerging markets funds between September 1999 and January 2005.
Their ndings suggest that these funds outperform the MSCI Index and the S&P 500 Index, but underperform the emerging
market index. But since their sample includes only funds with data for the full sample period of 64 months, their results are
clearly suffer from survivorship bias.
Eling and Faust (2010) study performance of mutual (and hedge) funds in emerging markets between January 1995 and
August 2008. They nd that these funds outperform the benchmark by 0.48% p.a. against the CAPM but underperform by
0.84% per annum against the FF model. However, the alphas under both models are not statistically signicant. As for the
distribution of statistically signicant alphas, 14.15% of the funds have positive CAPM alphas whilst 3.97% show negative
CAPM alphas. The corresponding estimates using the FF model are 10.33% and 3.97% respectively. However, the authors use
of a broadly diversied portfolio of US stocks (with a correlation of 0.97 with S&P 500) as the market factor in their models
to evaluate the performance of emerging market funds raises some concern about the validity of their conclusions.
Hayat and Kraeussl (2011) analyze the risk and return characteristics of a sample of 145 Islamic Equity Funds (IEF) that
focus mainly on global as well as region/country specic emerging markets over the period 20002009. Their results show

The alpha net of expenses, however, is not signicantly different from zero.

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119

that IEFs underperform both Islamic as well as conventional equity benchmarks with underperformance increasing during
the recent nancial crisis. They also nd that IEF managers have poor market timing ability.
Whilst studies examining the performance open-end equity funds are of utmost relevance to our paper, there is also a
section of literature that has looked at performance of closed-end funds. But the conclusions have been similar. For example,
Chang et al. (1995) nd closed-end emerging market funds fail to generate alphas for US-based investors. Lee (2001) observes
that closed-end country funds in emerging markets underperform their benchmark IFCI indices. Movassaghi et al. (2004)
also could not nd any evidence of superior performance of closed-end funds in any particular region or country within the
emerging markets.
ETFs offer an alternative route for investing in emerging markets through tracking of passive benchmark indices in these
markets. Blitz and Huij (2012) evaluate the performance of such funds in global emerging markets (GEM). They nd that, on
average, GEM ETFs fall short of their benchmark indexes by around 85 basis points per annum, which is consistent with the
expected drag on return due to fund expense ratios plus the impact of withholding taxes on dividends.
Finally, whilst our study focusses on equity funds, when investing in emerging markets, some investors also use hedge
funds as investment vehicles. Strmqvist (2007) presents evidence that emerging market hedge funds do not outperform
their underlying benchmarks during the period 19942004. This evidence is further supported by Peltomki (2008) who
nds inferior performance of emerging market hedge funds at the index level. However, he also nds that nearly 40% of
emerging market hedge funds shows positive abnormal returns. A further study by Abugri and Dutta (2009) also shows that
emerging market hedge funds are unable to consistently outperform their underlying benchmarks. Kotkatvuori-rnberg
et al. (2011) hypothesize that the poor aggregate performance of emerging market hedge funds may be due to lack of focus
of these funds. Their results suggest that a portfolio of emerging market hedge funds, which are geographically focused,
outperform their underlying stock market indices.
2.3. Performance persistence
The issue of persistence is of critical importance to investors. If there is evidence of persistence in performance, they
would allocate funds to those with superior past performance and punish poorly performing funds through redemption.
There are a vast number of studies that examines persistence in performance of mutual funds.
The traditional approach to detect persistence involves splitting a funds performance into two periods and utilizing the
rank correlation coefcient to investigate the statistical relationship between performances of the two periods. A positive
correlation would indicate persistence is evident. Sharpe (1966) rank performance based on Sharpe ratio for two decades
and reports a rank correlation of 0.36 but no statistically signicance. Jensen (1968) nds evidence of positive correlation in
alphas but it is largely attributed to persistence of inferior performance. Lehmann and Modest (1987) report some degree
of persistence but nd it to be highly dependent on the performance measure employed. Elton et al. (1993) also provide
evidence of positive persistence but mostly amongst underperforming funds.
A second method to examine persistence in performance is by sorting winners and losers over successive periods
and determining the statistical signicance of repeated winners or losers. Goetzmann and Ibbotson (1994) employ this
methodology to examine performance persistence of funds between 1976 and 1988. Their results suggest that past
performance do entail some predictive power on future performance across various time periods tested. Brown and
Goetzmann (1995) nd clear evidence of persistence but most of this phenomenon is attributed to underperformers.
Malkiel (1995) nds considerable persistence in funds during the 1970s but not in the 1980s. Lastly, Droms and Walker
(2001) test for long term and short term persistence over two decades. They nd evidence of short term but not long term
persistence.
Persistence can also be estimated by regressing current performance of a fund on its lags. Hendricks et al. (1993) follow
this method to estimate quarterly performance of mutual funds by incorporating up to eight lags. Their results show significant positive persistence in the rst four lags but insignicant negative persistence for the following four lags suggesting
persistence up to one year. Quigley and Sinqueeld (2000) use the FF model with yearly lags to detect persistence in the
performance in UK equity funds. They report evidence of persistence only amongst the losers and largely concentrated on
small cap funds.
Finally, another strand of literature uses the rank portfolio approach to examine persistence. This is done by forming
winner-loser portfolios of funds based on ranking criteria such as past returns or alphas. Consequently, a time series of returns
or alphas is generated from the portfolios and persistence is determined by their ability to outperform the benchmark in the
post-formation period. Hendricks et al. (1993) sort mutual funds into octiles based on past performance and nd evidence
short term persistence, particularly amongst poor performers. Overall, they nd stronger support for inferior persistence
than superior persistence. Elton et al. (1996) investigate persistence of funds by forming deciles and afrm persistence
over one year. Carhart (1997) estimate performance using a four factor model and suggest that size and momentum factors
can explain short-term persistence in performance. Again, persistence is more visible amongst poor performers. Blake and
Timmermanns (1998) study of UK mutual funds supports persistence in performance. In contrast to most other studies,
they observe persistence amongst both top and bottom performing funds. Finally, Bollen and Busse (2005) nd evidence of
persistence amongst top decile funds over one quarter post ranking but not over longer periods.
The question of persistence of performance amongst diversied emerging market funds has been barely investigated.
Amongst the two notable studies, Gottesman and Morey (2007) nd no evidence to support any relation between past and

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Table 1
Descriptive statistics for fund returns during the sample period. This table provides descriptive statistics of gross returns for mutual funds during the sample
period (August 2000July 2010). The reported minimum (Min), maximum (Max), median, mean, standard deviation (Std. Dev.), are calculated from each
funds average returns, whilst fund size and net expense ratios are also averaged over the sampled period.
Number
of funds
All funds
Surviving funds (full data)
Surviving funds (new)
Non surviving funds

498
202
224
72

Returns
Min (%)

Max (%)

Median (%)

Mean (%)

Std. Dev. (%)

5.71
0.44
2.12
5.71

3.39
2.06
3.38
3.39

1.19
1.22
1.17
1.06

1.05
1.22
1.00
0.66

0.75
0.22
0.72
1.38

Fund size
($ Million)

Net expense
ratio (%)

714.83
1418.65
271.30
82.98

2.08
2.19
1.96
2.16

future performance.4 The other study is by Huij and Post (2011) who examine persistence of 137 diversied emerging market
mutual funds between 1993 and 2006. The authors nd evidence of short term persistence in the return spread between
winner and loser funds. Interestingly, they nd that the contribution of winner funds to persistence is signicantly higher
in emerging markets compared to US market.

3. Data and methodology

3.1. Sample data
The sample data comprises of all open-end5 (including SICAV and ICVC6 ) emerging market mutual funds available on
Morningstar Directs database over the period from August 2000 to July 2010. These mutual funds are equity funds with a
small portion of assets invested in cash (approximately 6%). Whilst these funds are classied under diversied emerging
markets covering Asia, Latin America, Eastern Europe, Africa, and Middle Eastern countries, a small proportion of assets are
allocated to developed markets.7 The domiciles of these funds are also diverse including the US, UK, Luxembourg, Sweden,
Denmark, Finland, Spain, Italy, Ireland, Australia, Austria and Chile. For funds whose assets are denominated in currencies
other than US Dollar, we convert them into equivalent US Dollars using prevailing exchange rates.
To tackle survivorship bias in our sample we include all funds that have at least 12 months of returns reported during
the sample period with some exceptions. We omit funds without any reported returns as well as those with fragmented
return records. Regional or country specic funds (for example, JP Morgan Middle East Africa or BNP Brazil Equity) are also
excluded. For funds under the same management with identical or near-identical returns, only the fund with the oldest
history is selected. The resultant sample consists of 498 funds comprising 202 funds with full data over the sample period
(i.e. surviving funds with full data), 72 funds that became defunct (i.e. non surviving funds) and 224 funds that were incepted
during the sample period and are still in existence (i.e. new funds that survived).
Monthly net returns are calculated by taking the change in monthly net asset value for the fund, reinvesting all income
capital gains distribution during that month, less the expenses incurred during that month such as operating, management
and other asset related costs, and then dividing by the starting net asset value. Monthly gross returns are then derived by
adding back the most recent expense component to net returns. The returns are not adjusted for any sales charges such as
loading fees and redemption fees.
Table 1 provides summary statistics of the funds in our sample. Monthly returns for funds that are operational through
the full sample period average 1.22% with a standard deviation of 0.22%. All of these funds provide positive returns within
the range of 0.44% and 2.06%, a much smaller spread compared to new funds and non-surviving funds. Furthermore, these
funds also represent largest fund size category with an average of $1.42 Trillion assets under management. The average net
expense ratio at 2.19% is slightly higher than the other categories. A large number of funds in our sample are new funds i.e.
funds that were incepted during the sample period. For 224 such funds that survived till the end of the sample period, the
average return is slightly lower but standard deviation higher compared to the older surviving funds. However, these newly
established funds have a slightly lower average net expense ratio of 1.96%. The funds that do not survive for the full period,
not unexpectedly, perform the worst. The average return for these funds is only 0.66% with a high standard deviation of
1.38%. The range of returns for this category is from 3.39% to 5.71%.

4
The authors nd expense ratios of funds as the only signicant predictor of their future performance. Funds with lower expenses, on average, show
better performance.
5
Open-end refers to funds that continuously offers new shares to investors and redeems them on demand. Close-end funds, however, issues limited
shares and does not redeem. Bekaert and Urias (1999) nd open-end funds track the emerging market benchmark index better than closed-end funds.
6
SICAV and ICVC are Western European and UK equivalent of open-end funds.
7
We do not include funds that invest in specic regions such as Africa, the Middle East and Eastern Europe because it can produce alpha estimates
resulting from model misspecication rather than managerial skill.

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121

3.2. Methodology
We use two performance measurement models in our empirical analysis. The rst is the well-known Jensens alpha
based on the single factor Capital Asset Pricing Model (CAPM). Initially the following regression is performed following
Jensen (1968).
Rit Rft = it + i (Rmt Rft ) + it

(1)

where Rit is the monthly return of the fund i in the month t, Rft is the one month is the risk-free rate of return and Rmt is the
monthly return on the benchmark index. The Jensens alpha is given by it which gives the excess return of the fund that is
unexplained by the excess return of the benchmark index.
Second, we apply the FF three factor model of Fama and French (1993) to regress returns of the fund to allow for risk
adjustment after controlling for size and value factors.
Rit Rft = it + i (Rmt Rft ) + i SMBt + i HMLi + it

(2)

In addition to the excess return of market index as in (1), the FF model captures the excess return of small stocks over
large stocks (SMB) and that of value stocks over growth stocks (HML).
If emerging market fund managers have market timing ability, they will switch portfolios to high or low beta securities
depending on whether future returns are expected to be high or low respectively. Unless this timing ability is explicitly
accounted for in our performance measurement model, the beta coefcient will increase (decrease) in case of positive
(negative) forecast of excess market return and as a result systematically downward bias the alpha estimate. In order to avoid
the possibility of such bias, we also conduct nonlinear regressions of realized returns of the fund against contemporaneous
market returns following Henriksson and Merton (1981). This also enables us to explicitly test for market timing ability
of the funds.8 The HenrikssonMerton market-timing measure allows for the beta risk to be different in rising and falling
markets. Specically,
Rit Rft = i + i (Rmt Rft ) + i (Rmt Rft ) D + it

(3)

where D is a dummy variable that equals 1 for (RMt Rft ) > 0 and zero otherwise, and i and i are the selectivity and market
timing coefcients respectively. Under the null hypothesis of no market timing i is expected to be zero, whereas for a
successful market timer it should exhibit a positive value.
Finally, to investigate persistence in fund performance, we employ the rank portfolio approach. Starting November 2000,
we rank individual funds every month based on their average cumulative excess returns over the previous quarter and group
them into deciles. The portfolios are equally weighted comprising the winners (decile 10) through to the losers (decile 1),
and these are held for 3 months and 6 months following formation. The portfolios are revised every month as fund rankings
change thus generating a time series of monthly excess returns for each decile portfolio from. Funds that do not survive till
the end of our sample period are included until they disappear. We compute the alphas for the decile portfolios by regressing
their excess returns against excess returns of the market index as per (1). A positive and statistically signicant difference
between the top and bottom decile alpha estimates would suggest persistence.
We use the MSCI Emerging Markets Investable Index denominated in US dollars as the benchmark for emerging market
returns. The index aims to capture 85% of total stock market capitalisation of global emerging markets. We use the one
month US Treasury bill rate as the proxy for the risk-free rate. Currently there is no available data for Fama French factors for
emerging markets as a whole. Cremers et al. (2010) suggest constructing factors based on common and easily tradable size
and style indices. Common style indices like MSCI are not only convenient to use for emerging markets (which cover many
national markets) but can also provide for construction of reasonably good proxies for the Fama French factors. Dyck et al.
(2013) use local MSCI indices to calculate local Fama French factors in their study of the international mutual fund industry.
Cuthbertson and Nitzsche (2013) also do the same in their study of the German equity mutual fund industry. More recently,
Bruckner et al. (2014) include SMB and HML time series based on MSCI indices for Germany.
Morningstar provides four subsets of MSCI emerging market indices which replicate size segment and style segment
indices. The MSCI Emerging Markets Large Cap Index includes large cap emerging market rms with approximately 70% of
market capitalization coverage (MSCI Barra, 2010). Similarly, the MSCI Emerging Markets Small Cap Index offers exposure to
small cap companies across the countries listed on the MSCI emerging market index aggregating to 15% market capitalization
coverage. We proxy the SMB return premium using the difference between monthly returns of these two indices. As for the
HML premium, we derive the proxy by taking the difference in returns generated between the MSCI Emerging Markets Value
Index and MSCI Emerging Markets Growth Index.9

An alternative test of market timing ability is given by the quadratic regression model of Treynor and Mazuy (1966).
The variables to assemble the value characteristics of the companies listed in MSCI emerging markets index are book value to price ratio, price to
earnings ratio and dividend yields. As for growth characteristics, the determinates are book value to price ratio, long term forward earnings per share, short
term forward earnings per share growth rate and may also consider the current internal growth rate and long term historical earnings per share trend
(MSCI Barra, 2007).
9

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Table 2
Average gross returns based performance: all funds. This table reports the regression estimates for an equally weighted portfolio of 498 funds in our sample
between August 2000 and July 2010. Panel A1 and A2 depicts the regression estimates under the single factor CAPM and Fama and French (FF) three factor
model for the entire sample respectively. Panel B1 and B2 reports regression estimates for fund quartiles formed by ranking the alphas of individual funds
from the two models. Q1, Q2, Q3 and Q4 represents rst, second, third, and fourth quartiles respectively. The spread between the top and bottom quartiles
is denoted by Q4Q1.

(Rm Rf)

SMB

HML

Adjusted R2

Panel A1: full sample CAPM

Coefcient
0.1106
0.2706
Std Error
0.2532
t-Stat

0.9662***
0.0328
42.5174

Panel A2: full sample: FF model

0.1453
Coefcient
0.2725
Std Error
0.3214
t-Stat

0.9601***
0.0339
41.9454

Panel B1: quartile analysis: CAPM

0.3110
Q4
Q3
0.0264
0.1361
Q2
0.6426
Q1

1.0108***
0.9829***
0.9609***
0.9104***

0.9074
0.9536
0.9430
0.8288

0.9536***

0.1004***

0.0786

Panel B2: quartile analysis: FF model

Q4
0.2659
Q3
0.0088
Q2
0.1414
0.7134
Q1

1.0084***
0.9815***
0.9578***
0.8929***

0.0458
0.0396
0.0678
0.1849**

0.0065
0.0406
0.0004
0.0182

0.9222
0.9526
0.9453
0.8292

0.9793***

0.1155***

0.1391***

0.0248*

0.0930

Q4Q1

Q4Q1
*
**
***

0.9081

0.0847
0.1124
0.5206

0.0132
0.1995
0.1167

0.9122

Signicance at 10% level.

Signicance at 5% level.
Signicance at 1% level.

4. Empirical results
4.1. Performance of all funds
Table 2 provides the mean returns for all 498 mutual funds during the full sample period. Monthly excess returns of
an equally weighted portfolio of all funds are regressed against monthly excess benchmark returns using the single factor
CAPM (panel A1) and the three factor FF model (panel A2). Under the two models, the average fund underperformed the
benchmark by 0.11% and 0.15% per month (1.33% and 1.74% per annum) respectively. However, neither of the alphas is
signicantly different from zero. The market beta coefcient under both models is in excess of 0.96 suggesting most of the
funds closely track the returns of the MSCI Emerging Markets index. The SMB and HML coefcients in the three factor model
are statistically insignicant. The R2 for both the models indicate that more than 90% of the variation in the emerging market
funds returns is explained by the broad market movement. This may indicate emerging market funds generally are more
focused on achieving diversication rather than taking active bets in these markets. The insignicant coefcients for SMB
and HML factors also suggest that emerging market funds in general do not have any signicant size or value/growth tilt in
their portfolios.
Panel B1 and B2 provides the regression results of fund quartiles sorted by alpha of individual funds. Each quartile
estimates represent those of an equally weighted portfolio of funds within each quartile. The average rst quartile fund
outperforms the market but not by a statistically signicant margin. The outperformance is also not large enough to outweigh
the negative impact of the fourth quartile funds as these underperform the index by 0.64% and 0.71% per month (7.718.57%
per annum) under the two models. The spread in alphas between the rst and fourth quartile funds are strongly signicant.
An interesting trend observed in Table 2 is the reduction in the estimated market beta from the rst to fourth quartile.
The lower quartile funds are slightly less volatile than the benchmark index. The difference in market beta between the top
and the bottom quartile funds is signicant. This could indicate that underperforming funds either overweight their holdings
of stocks in defensive sectors or hold higher proportion of cash relative to the top performers. The latter may be caused by
higher liquidity requirements if these funds confront a higher redemption rate. The results also show signicant difference
between top and bottom quartile funds in terms of their exposure to size factor. The bottom quartile funds demonstrate a
higher tilt towards large cap stocks.
Comparing our results with those of pervious studies on emerging market funds, Eling and Faust (2010) report postive
alpha with CAPM and a much lower underformance of 0.48% p.a. for the FF model. However, their results may be subject to
model misspeccation due to their selection of S&P 500 as benchmark rather than any index representing emerging market
stocks. Huij and Post (2011) estimate CAPM alpha on the terciles formed from ranked returns of the funds. The spread

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123

Table 3
Average gross returns based performance: funds surviving full sample period. This table reports the regression estimates for an equally weighted portfolio
of 202 funds that survived through the full sample period (August 2000 to July 2010). Panel A1 and A2 depicts the regression estimate under the single
factor CAPM and Fama and French (FF) three factor model for the entire sample respectively. Panel B1 and B2 reports funds quartiles formed by ranking the
alphas of individual funds from the two models. Q1, Q2, Q3 and Q4 represents rst, second, third, and fourth quartiles respectively. The spread between
the top and bottom quartiles are denoted as Q4Q1.

(Rm Rf)

Panel A1: CAPM

Coefcient
Std Error
t-Stat

0.0061
0.1658
0.0313

0.9704***
0.0217
53.9328

Panel A2: FF model

Coefcient
Std Error
t-Stat

0.0107
0.1655
0.0536

0.9698***
0.0215
54.4810

Panel B1: quartile analysis: CAPM

0.2726
Q4
Q3
0.0518
0.0673
Q2
0.2816
Q1

0.9765***
0.9949***
0.9701***
0.9407***

Q4Q1

0.5542***

SMB

0.0329
0.0709
0.2942

0.5145***

0.0553***

0.0675**

**

0.9368

0.0341

0.0358**
0.0127
0.0274
0.0109
0.0802

***

0.0002
0.1108
0.1200

0.8944
0.9578
0.9550
0.9285

0.9908***
0.9750***
0.9781***
0.9356***

Adjusted R2
0.9337

Panel B2: quartile analysis: FF model

Q4
0.2415
Q3
0.0478
Q2
0.0587
0.2731
Q1
Q4Q1

HML

0.0221
0.0383
0.0184
0.0408
0.0628*

0.9139
0.9387
0.9606
0.9345
0.0207

Signicance at 10% level.

Signicance at 5% level.
Signicance at 1% level.

between top and bottom terciles are much smaller (4.44% p.a.) compared with our results of top and bottom quartiles
ranked by individual funds alpha (11.44% p.a.). On the other hand, there are also some similarities between our results and
those of Huij and Post (2011). The size and value factor coefcients are comparable with their results as they are insignicant.
The R2 values are very similar with their models explaining more than 90% of the variation in returns. The alphas for the
bottom tercile in their study are signicant similar to our results for net returns (which we do not provide here), where the
bottom quartile alpha was statisitically signicant.
4.2. Performance of surviving funds with full data
We separately evaluate the funds with full data to see whether these funds earn positive abnormal returns and also
to determine the magnitude of survivorship bias in the sample. This approach to estimate survivorship bias by taking the
difference between the alpha for surviving funds with full data and that for the entire sample is consistent with previous
studies (see Malkiel, 1995; Elton et al., 1996; Brown and Goetzmann, 1995).
As shown in Table 3, the alphas are still negative but statistically insignicant. There is also noticeable improvement
in their estimates. The annualized alpha estimate is 0.07% and 0.13% for the single factor and the three factor model
respectively. All other coefcient estimates remain consistent with Table 2. Whilst, the top quartile alpha is close to its
corresponding estimate for all funds, the bottom quartile alpha improves considerably. The spread between the top and the
bottom quartiles is almost halved to around 0.55 (6.4% p.a.). Even though the magnitude of underperformance is greatly
reduced, the funds that survived the entire sample period still on average do not outperform the market. It could be because of
the difculty to exploit price anomalies as the older funds tend to be funds with large capitalisation and therefore closely following the market index. Overall, our results show that if our sample consisted of only these surviving funds, the performance
would be overstated by nearly 3% per year i.e. the results would be subject to severe survivorship bias.
4.3. Non-surviving funds
Table 4 summarizes the performance of non-surviving funds i.e. funds that do not exist at the end of our sample period.
These funds underperform the benchmark by as much as 4.25% per annum before becoming defunct. It is also obvious that
the distribution of returns is highly skewed towards the left with an alpha below 13% per annum. Another interesting point
concerns the beta coefcient spread between top and bottom quartiles. Comparing the results with the survivor funds, the
spread is much larger for non-surviving funds due to the much lower systematic risk of the bottom quartile funds.

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Table 4
Average gross returns based performance: non-surviving funds. This table reports the regression estimates for an equally weighted portfolio of 72 funds
that were deceased during the sample period. Panel A1 and A2 depicts the regression estimate under the single factor CAPM and Fama and French (FF)
three factor model respectively. Panel B1 and B2 reports funds quartiles formed by ranking the alphas of individual funds from the two models. Q1, Q2, Q3
and Q4 represents rst, second, third, and fourth quartiles respectively. The spread between the top and bottom quartiles are denoted as Q4Q1.

(Rm Rf)

Panel A1: CAPM

Coefcient
Std Error
t-Stat

0.3299
0.3288
0.8060

0.9424***
0.0408
32.7504

Panel A2: FF model

Coefcient
Std Error
t-Stat

0.3545
0.3327
0.7801

0.9372***
0.0425
31.6340

Panel B1: quartile analysis: CAPM

0.2238
Q4
0.1292
Q3
Q2
0.2867
1.1273
Q1

1.0111***
0.9814***
0.9527***
0.8243***

0.9367
0.9508
0.9293
0.7298

1.3512***

0.1868***

0.2069

Panel B2: quartile analysis: FF model

0.2136
Q4
Q3
0.1333
Q2
0.3091
Q1
1.1891

1.0200***
0.9621***
0.9304***
0.8363***

0.0626
0.0528
0.0041
0.1742

0.0198
0.0143
0.0113
0.0669

0.9534
0.9449
0.9329
0.7344

1.4027***

0.1837***

0.1116**

0.0867*

0.2189

Q4Q1

Q4Q1
*
**
***

SMB

HML

Adjusted R2
0.8867

0.0734
0.1331
0.3331

0.0054
0.2254
0.0026

0.8914

Signicance at 10% level.

Signicance at 5% level.
Signicance at 1% level.

4.4. Performance during the nancial crisis sub-period

We measure the performance of the funds exclusively for the 2-year sub-period (August 2008 to July 2010) following
the onset of the global nancial crisis (GFC), a period marked with high volatility in most equity markets. The selection of
this sub-period is important for two reasons. First, it enables us to observe the impact of the crisis and associated volatile
market conditions on the performance of emerging market funds. If fund managers possess market timing skill, they will
correctly adjust the portfolio risk anticipating the market movements. Second, given the ndings by Moskowitz (2000) who
documented that during recessionary periods US funds perform better due to information asymmetries as compared to poor
performance in expansionary periods, it would be of interest to nd out whether emerging market funds performance is
consistent with this phenomenon. 62 funds are omitted from the sample as they are either defunct or are due to defunct
without at least 18 months of returns reported.
Table 5 presents results for the sub-period from August 2008 to July 2010. On average, funds seem to underperform the
benchmark for both the models but the negative alphas are not statistically signicant. The results are comparable with
Eling and Fausts (2010) analysis of emerging market funds during the Asian crisis in 1997. Their results showed an annual
underperformance of 2.06% and 1.95% for the CAPM and the FF models respectively. A possible reason for these results is
that emerging market funds can face higher redemptions during crisis periods. Given the risky nature of emerging markets,
investors are more likely to switch, by selling off assets and switch to more stable and liquid assets in developed markets. In
contrast, money only starts to trickle in emerging markets after conditions stabilize and returns improve. This asymmetric
nature of the fund ow may prove to be a hindrance to the managers ability to time the markets and outperform the
benchmark index.
The performance of the different fund quartiles during the crisis period is revealing. The funds in the top quartile have a
slightly higher alpha during the crisis relative to that for the full sample period under both models. The rest of the quartiles,
however, have inferior performance. The bottom quartile funds appear to experience a particularly rough period with the
magnitude of their underperformance almost doubling during the nancial crisis compared the full sample period. As a
result, the difference between the alphas of the top and bottom quartiles increases almost two-fold.
Furthermore, the beta estimates across the quartiles show an opposing trend compared to the full period analysis. The
beta coefcients for the top quartile funds are slightly lower than the market whereas those for the bottom quartile funds are
slightly higher. Therefore, we can only conclude that the top performers seem to have adjusted their portfolio risk perhaps
by shifting allocations into safer assets like cash whereas the bottom performers were not able appropriately adjust their
funds beta during market downturns.

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125

Table 5
Average gross returns based performance: sub-period August 2008 to July 2010. This table reports the regression estimates for an equally weighted portfolio
for 437 funds that had 18 months of returns data reported during the sub-period August 2008 to July 2010. Panel A1 and A2 depicts the regression estimates
under the single factor CAPM and Fama and French (FF) three factor model respectively. Panel B1 and B2 reports funds quartiles formed by ranking the
alphas of individual funds from the two models where the reported coefcients and adjusted R2 are based on quartile averages. Q1, Q2, Q3 and Q4 represents
rst, second, third, and fourth quartiles respectively. The spread between the top and bottom quartiles are denoted as Q4Q1.

(Rm Rf)

SMB

HML

Adjusted R2

Panel A1: all funds: CAPM

Coefcient
0.2716
0.5122
Std Error
0.3741
t-Stat

1.0015***
0.0464
34.5738

Panel A2: all funds: FF model

0.3917
Coefcient
0.6431
Std Error
0.4312
t-Stat

0.9819***
0.0646
26.6638

Panel B1: quartile analysis: CAPM

0.4316
Q4
Q3
0.0216
0.2873
Q2
1.2070
Q1

0.9860***
0.9827***
0.9921***
1.0450***

0.9632
0.9743
0.9726
0.8675

1.6386***

0.0590***

0.0956

Panel B2: quartile analysis: FF model

Q4
0.3279
Q3
0.0489
Q2
0.3501
1.4925
Q1

0.9875***
0.9850***
0.9663***
0.9887***

Q4Q1

Q4Q1
*
**
***

0.9443

0.1287
0.2864
0.4713

0.0012

1.8205***

0.0838
0.4625
0.4349

0.9446

0.0142
0.0812
0.1855*
0.2623**

0.0346
0.1476
0.2773
0.1220

0.9640
0.9782
0.9673
0.8696

0.2765***

0.1566*

0.0944

Signicance at 10% level.

Signicance at 5% level.
Signicance at 1% level.

4.5. Performance of individual funds

Apart from the equally weighted portfolio of funds constructed for all of the above analyses, we replicate the analysis
by conducting time series regressions for individual funds. Fig. 1 illustrates the distribution of monthly alphas for all funds
under the two models that depict very similar distributions. The peak of the distribution shows that the majority of alphas
are clustered around zero. The alphas for most funds lie within the 0.25 and 0.25 range. The distribution is also skewed
towards the left suggesting there are more underperforming funds than there are outperforming funds relative to their
benchmark. Whilst we do not report the full descriptive statistics for the distribution, the median alpha estimate is negative
(0.28%). When we look at the distribution of funds which survive the full period as well as the distribution of funds that
do not survive, the median alpha estimates turns out to be negative (0.05% and 0.45% respectively).
Table 6 summarizes the percentage of individual funds with alphas that are insignicant as well as the percentage that
are signicantly positive and negative under the two models. The results illustrate that the largest proportion of funds in
our sample have insignicant alphas. For funds with signicant alphas, the proportion of funds with signicantly positive

Table 6
Alphas for individual funds. This table presents the percentage of individual funds with alphas that are statistically (i) insignicant (=0), (ii) signicantly
positive (>0) and (iii) signicantly negative (<0) at 5% level. Panel A and B report alphas based on CAPM and Fama and French (FF) three factor model
respectively.
Percentage of funds with alpha
Total

=0

>0

<0

Panel A: CAPM
All mutual funds
Full data funds
Non-surviving funds
Sub-period

498
202
72
437

85.35
83.17
79.16
90.85

5.42
8.91
4.17
3.20

9.23
7.92
16.67
5.95

Panel B: FF model
All mutual funds
Full data funds
Non-surviving funds
Sub-period

498
202
72
437

84.94
84.65
75.00
94.28

5.62
8.42
6.94
1.60

9.44
6.93
18.06
4.12

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Fig. 1. (a) Distribution of CAPM alphas. This gure shows the frequency distribution of the estimated regression intercepts using the Capital Asset Pricing
Model. (b) Distribution of FF alphas. This gure shows the frequency distribution of the estimated regression intercepts using Fama and French three factor
model.

alphas is less compared to the proportion of those with signicantly negative alphas.10 However, Eling and Faust (2010)
reported a higher percentage of statistically positive alphas than negative alphas for both performance measures on emerging
market funds. As discussed before, their results may be inuenced by their selection of a portfolio of US stocks as the market
benchmark index.
As an exception to the general trend in the results, amongst funds that survive the full sample period, the proportion
of signicantly positive alphas is greater than that of signicantly negative alphas. The proportion of funds with positive
(negative) alphas was 8.91% (7.92%) for CAPM and 8.42% (6.93%) for the FF model. This may suggest that funds with long
tenure, to some extent, may have the expertise in capturing postive risk-adjusted returns at the gross level.
For non-surving funds, surprisingly a small proportion has positive alphas. A possible explanation could be that these
funds do not represent those that are forced to close down due to bad performance but in fact, are mereged or taken over,
possibly because of their strong performanc and consequent attractiveness. For the nancial crisis sub-period, we have the
largest porporption of statistically insigncant alphas under both models.
4.6. Nonlinear regression estimates
Table 7 reports the estimates for nonlinear regression model based on Henriksson and Merton (1981) model as represented by Eq. (3). For the aggregated sample of 498 funds shown in panel A, we do not nd any evidence of selectivity or
market timing skill as both the alpha and lambda estimates are not signicant. When we conduct the same analysis based on
quartiles (panel B), the results do not change. None of the alphas or lambdas is statistically signicant although the difference
between the alphas of top and bottom quartile funds remain signicantly positive for this model. However, the difference in

10
Although we do not present the results for alphas net of expenses, for majority of the funds that exhibit positive alphas, we nd they turn insignicant
when expenses are factored in. This is consistent with Grinblatt and Titman (1989), Malkiel (1995) and Wermers (2000) who all reported an increase in
statistically signicant negative alphas under net returns evaluation.

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127

Table 7
Market timing performance: 498 mutual funds for the period August 2000 to July 2010. This table reports the regression estimates based on Eq. (3). Panel A1
shows the regression estimates for an equally weighted portfolio of all 498 funds. Panel A2 shows the regression estimates for equally weighted portfolio
of fund quartiles formed by ranking the alphas of individual funds given by Eq. (1). Q1, Q2, Q3 and Q4 represents rst, second, third, and fourth quartiles
respectively. The spread between the top and bottom quartiles are denoted as Q4Q1.

(RmRf)

t (Rmt Rft )

0.1595
0.4191
0.3989

1.0019***
0.0529
27.1912

0.0925
0.1070
0.7615

0.9100

0.8463
0.2465
0.0194
0.4739

1.0966***
1.0215***
0.9782***
0.9113***

0.2796
0.0798
0.0255
0.0143

0.8457
0.9497
0.9497
0.8943

0.1852***

0.2938

0.0486

Panel A1: full sample

Coefcient
Std Error
t-Stat
Panel B1: quartile analysis
Q4
Q3
Q2
Q1
Q4Q1
***

1.3202***

Adjusted R2

Signicance at 1% level.

Table 8
Market timing coefcients for individual funds. This table exhibits the percentage of individual funds with market timing coefcient (lambda) that is
statistically (i) insignicant (=0), (ii) signicantly positive (>0) and (iii) signicantly negative (<0) at 5% level.
No. of funds

All mutual funds

Full data funds
Non-surviving funds
Sub-period

498
202
72
470

Percentage of funds with lambda

=0

>0

<0

81.93
85.64
79.17
74.90

1.81
1.98
1.38
8.30

16.26
12.38
19.45
16.80

lambdas between the two quartiles is negative (although not signicant) and that somewhat counterbalances the positive
difference in alphas.
Turning to the market timing coefcients of individual funds, Table 8 reports the percentages of funds with lambdas that
are insignicant as well as of those that have signicantly positive and negative lambdas. Less than 2% of the funds show
evidence of market timing ability with signicantly positive lambdas. On the other hand, more than 16% of the funds report
negative lambdas.11 For funds that survive the full sample period, the estimated percentage of funds with positive lambdas
barely increase but that of funds with negative lambdas decrease by about 25%. The trends are opposite for the non-surviving
funds with decrease (increase) in percentage of funds with positive (negative) lambdas. A very interesting result is observed
for the estimates during the GFC sub-period. The percentage of funds with positive lambda during this 18-month period
is 8.30% i.e. more than 4 times of that during the full sample period. There is corresponding fall in the number of funds
with insignicant lambdas. It suggests that some emerging market funds may have been more active in their market timing
activities during the nancial crisis.
Overall, the absence of market timing ability for emerging market funds is not entirely unexpected. As discussed previously, most of the funds may just seek to have exposure in these markets by simply mimicking the index rather than
generate excess returns by timing the market. Our evidence of only a small proportion of funds having market timing ability
is consistent with the ndings of bulk of empirical studies in the developed markets (see for example, Wermers, 2000;
Cuthbertson et al., 2008).12
4.7. Persistence in performance
For measuring persistence in performance of emerging market funds, we form decile portfolios based on past quarters
performance as described in Section 3.2. Table 9 reports the average alphas for the decile portfolios over holding periods
of 3 and 6 months after portfolio formation. The results show persistence for both the best and the worst performers as
they continue to remain in the top and bottom deciles respectively. The annualized average alpha spread between the top

11
Adequate caution should be exercised in interpreting such a perverse outcome. One explanation is that higher cash inows (outows) from investors
during rising (falling) markets bias market timing coefcients downwards (see, for example, Bollen and Busse, 2001).
12
Borensztein and Gelos (2000) examine the behaviour of emerging market funds with respect to movement of funds between different individual
markets. They nd evidence that funds withdrew large sums from the affected country in the month prior to the crisis. However, in many cases, the
withdrawn money was invested in other countries that were seen as suffering from contagion effects. The study did not examine how fund ow behaviour
affected performance.

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Table 9
Performance of mutual fund decile portfolios formed based on performance over past quarter. Funds are sorted every month between November 2000 to
April 2010 into equally weighted decile portfolios based on their previous quarters average cumulative excess return. Funds with the highest and lowest
returns over past 3 months comprise Decile 10 and Decile 1 respectively. The average monthly excess returns of each decile for next 3 months and 6
months are shown below. The spread between Decile 10 and Decile 1 is denoted highestlowest with t-statistics indicated in parenthesis. The last two
rows represent the proportion of persistence during the individual months of the sample period.
Portfolio decile

Average excess holding period alphas

3 Months

6 Months

10 (highest)
9
8
7
6
5
4
3
2
1 (lowest)

0.102
0.020
0.021
0.181
0.157
0.228
0.254
0.246
0.262
0.267

0.018
0.093
0.089
0.083
0.100
0.132
0.168
0.216
0.202
0.226

Highestlowest
Proportion of holding periods with positive persistence
Proportion of holding periods with negative persistence

0.368*** (3.003)
35.09% (40 out of 114)
14.06% (16 out of 114)

0.244* (1.730)
28.83% (32 out of 111)
18.92% (21 out of 111)

*
***

Signicance at 10% level.

Signicance at 1% level.

and the bottom decile portfolios is 4.5% for the 3-months holding period which is statistically signicant at 1% level. For the
6-months holding period, the annualized spread of 2.96% exhibits weaker signicance at 10% level.
We nd that approximately 35% of the 3-month holding periods exhibit statistically signicant positive persistence. This
decreases to 29% for holding periods of 6 months. Conversely, there are also some holding periods where bottom performers
signicantly outperform top performers. The proportions of such periods of negative persistence are 14% and 19% for the 3
and 6 months holding period respectively.
Whilst our results support persistence in performance amongst emerging market mutual funds observed by Huij and
Post (2011), there are two important differences. Huij and Post (2011) report the alpha spread between the top and bottom
ninth of their fund sample to be 7.09% but we nd the spread between the top and the bottom deciles to be signicantly
smaller. One explanation of this difference could be our use of longer holding periods (3 and 6 months) for performance
evaluation compared to the 1-month holding period in their study as it is likely that the persistence would be more visible
over shorter periods. This trend is also apparent from our results as the return spread between the top and bottom decile
portfolios declines substantially over the 6-month holding period (relative to the 3-month holding period) and is no longer
statistically signicant at 5% level.
The other point where we differ from Huij and Post (2011) is that we nd that the persistence in fund performance is
driven more by the bottom performers than by the top performers. Huij and Post (2011) claim the top ninth funds in their
sample outperformed the benchmark by 4.29% whereas the bottom ninth underperformed it by 2.8% on a risk-adjusted
basis. The corresponding annualized alphas for the top and bottom decile portfolios in our study are 1.23% and 3.25% for
the 3-month holding periods. Our result is consistent with the evidence of persistence in the US like Carhart (1997) who nd

Fig. 2. Performance spread (cumulative) between best and worst performers. This gure shows the cumulative excess return spread between top and
bottom decile funds ranked by past quarters performance.

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the lowest return funds to be largely responsible for persistence in mutual fund performance and in UK where Cuthbertson
et al. (2010) nd persistence amongst loser funds but not amongst winner funds.
Fig. 2 demonstrates the cumulative excess return spread between top and bottom decile funds ranked by their returns
over the previous quarter throughout the entire sample period. It is apparent that the cumulative excess return spread for
the 3 months holding period is generally higher compared to the 6 months holding period, indicating persistence is stronger
for shorter evaluation periods. The overall trend shows a gradual increase in the spread over time, suggesting persistence in
emerging market funds is not specic to a particular sub-period. The exception to this is the period following the onset of
the nancial crisis.13
5. Conclusions
The purpose of this study was to examine the ability of diversied emerging market equity funds to produce risk-adjusted
returns over and above a comparable market benchmark index. Amongst studies of fund performance in developed markets,
most have reported no superior performance, which is consistent with ones expectation in informationally efcient markets.
Emerging markets, on the other hand, are commonly considered to offer greater opportunities for fund managers to exploit
stock mispricing and information asymmetries. Our results do not support this notion as we demonstrate that on an average
diversied emerging market funds do not outperform their benchmark index. Our analysis of individual funds shows that
nearly 95% of emerging market funds fail to outperform the benchmark index. Most of these funds have market beta risk
that is close to the benchmark, which may suggest that these funds mainly aim to offer diversication benets to investors
rather than seek superior risk-adjusted returns through active fund management. We test for market timing skills of funds
but nd that less than 2% of funds show evidence of superior ability at a statistically signicant level.
We conduct separate analysis of fund performance for the period since the onset of nancial crisis which marks a period
of signicant volatility. Emerging market funds, expectedly, have inferior risk adjusted performance during this period.
However, surprisingly, the average alpha of the top quartile funds is higher during this sub-period than that during the full
sample period. The other quartiles, particularly the bottom quartile, is however signicantly poorer during this sub-period.
Interestingly, the proportion of funds showing superior market timing ability increase signicantly during the sub-period,
although it is still less than one in ten.
We also look for the evidence of persistence in emerging market funds performance. Consistent with past studies evaluating mutual fund performance, we nd evidence of short term persistence amongst emerging market funds. But unlike
the recent ndings on persistence in emerging markets by Huij and Post (2011), we nd that the poorly performing funds
play a greater role in driving persistence than the top performers. In this respect, our results are more in agreement with
the evidence of persistence in developed markets.
Why do most diversied emerging market funds fail to outperform the benchmark? There are two possible explanations.
First, emerging markets in recent times may be no less informationally efcient than developed markets as shown by Grifn
et al. (2010). In that case, fund managers in emerging markets will nd it almost as difcult to outperform the benchmark
index on a risk-adjusted basis as their counterparts in the developed markets. If funds face higher transaction costs in
operating in emerging markets, they will nd it even harder to beat the market on a net basis. Second, a body of research has
shown domestic fund managers to have informational advantages over their foreign counterparts (Shukla and van Inwegen,
1995; Bialkowski and Otten, 2011). Since the diversied equity funds in our study are generally domiciled in developed
markets and mainly run by foreign managers, they might be at a disadvantage in exploiting any potential inefciency in
emerging markets.
The ndings of our study have important implications for investors. Our evidence suggests that attempts to earn superior
risk-adjusted returns by investing in diversied emerging market equity funds are likely to be disappointed. Whilst emerging
markets can offer potential diversication benets to investors in developed markets, these benets are sensitive to the
particular investment vehicle used by the investor (Bekaert and Urias, 1999). In light of our evidence, it appears that equity
funds that diversify across multiple emerging markets may not be the best vehicle to access such opportunities. In absence
of superior risk-adjusted performance (alpha) by these funds, investors would be better off by allocating to ETFs which can
provide similar diversication opportunities through beta exposure at a lower cost. The other alternative that investors
can consider is to invest in funds that focus on individual emerging markets as there is some evidence in the hedge fund
literature showing that funds with a geographical focus do better than those that invest across multiple emerging markets.
It is quite possible that funds will have informational advantages when they have a clear geographical focus as suggested
by Kotkatvuori-rnberg et al. (2011).
One limitation of our study deserves particular attention. We have not considered the heterogeneity across different
geographical regions or markets comprising the emerging markets. Whilst all funds evaluated in this study hold diversied
portfolios across these markets, there may be individual funds with greater (lesser) exposure to certain regional markets.
Broad emerging market indexes like MSCI may not capture the true systematic risk of such funds. Future research could look

13
One can conjecture that the spread net of fees and expenses would be smaller if the better performing top decile funds increase their fees subsequently to
reect the value difference they create for investors compared to the underperformers. However, this is unlikely given the evidence of negative relationship
between before-fee performance and fees documented in the mutual fund literature (see, for example, Gil-Bazo and Ruiz-Verd, 2009).

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more closely into the specic asset allocation of emerging market funds and evaluate their performance by constructing
more appropriate benchmarks.
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