Barbara Abou Tanos

Composition of the Jury

Abstract

The relationship between mutual fund portfolio allocation decisions and the private information held by their managers regarding global risk factors has not been extensively analyzed. The literature also lacks studies on the impact of global private information on the performance of equity mutual funds. Our work aims to shed new light on this topic by demonstrating that private information on global risk factors is crucial for investment decisions and for the performance of mutual funds when they invest abroad. In the first paper, we examine how private information on global factors, held by fund managers, impacts their performance. After using several performance models and various managerial characteristics, we find a positive and significant impact of private global information on the performance of U.S. global mutual funds. We show that the global information that generates performance is that related to industrial sectors. This is consistent with the results of Albuquerque et al. (2009) and Hiraki et al. (2015). We also show that the degree of sectoral concentration (DSC) is a noisy indicator of the informational advantage held by fund managers. The degree of sectoral concentration positively affects fund performance during periods of financial stability. However, this positive impact is significant only for funds with a strong informational advantage over global factors. In the second article of this dissertation, we seek to shed light on the allocation choices of global funds and the evaluation of their performance during the recent subprime crisis. Specifically, we examine whether it was the fund managers’ informational advantage over global risk factors or their familiarity with certain foreign financial markets that guided their investment choices and enabled them to enhance their performance during this crisis. We control our results for the role of financial market transparency as well as the level of investor protection. We find that the informational advantage regarding global (industry-level) risk factors contributes positively to fund performance over the entire study period. The “flight to familiarity” during the recent financial crisis is detrimental to fund performance and can be considered a bias. Fund managers who seek to invest in familiar securities during the financial crisis do not create value for their clients. In our third paper, we examine the determinants of portfolio rotation strategies across different industries and the impact of this strategy on the performance of U.S. mutual funds. We find that mutual funds that engage in sector rotation strategies improve their performance. This result is consistent with findings in the literature suggesting that actively managed funds outperform. Furthermore, we find that funds’ sector rotation strategy is positively and significantly influenced by managers’ informational advantage over global risk factors. This study is consistent with several articles in the literature that highlight the growing importance of sector-specific information for asset management (Hiraki et al., 2015; Schumacher, 2017). This paper also confirms various arguments suggesting that sector rotation could be considered an optimal strategy for portfolio selection in the context of financial market internationalization (Weiss, 1998; Cavaglia et al., 2004).