Risk‐adjusted performance of international mutual funds

Abstract

Purpose -This paper aims to evaluate the risk-adjusted performance of US-based international equity funds using objective statistical measures grounded in modern portfolio theory, and to present the results in a manner which is easily understood by the average investor. Design/methodology/approach -This study evaluates the performance of 50 large US-based international equity funds using risk-adjusted returns during 1994-2003. In particular, a relatively new risk-adjusted performance measure (M squared), first proposed by Franco Modigliani and Leah Modigliani in 1997, is used to evaluate these equity funds. Findings -The empirical results show that the funds with the highest average returns may lose their attractiveness to investors once the degree of risk embedded in the fund has been factored into the analysis. Conversely, some funds, whose average (unadjusted) returns do not stand out, may look very attractive once their low risk is factored into their performance. Research limitations/implications -It may be worthwhile to examine the effects of factors such as fund manager compensation, service fees, corporate governance metrics, and overweighting in risky countries/regions on the performance of international equity funds. Practical implications -The evidence presented in this study can be used as input in decision making by investors who are exploring the possibility of participating in the global stock market via international equity funds. Originality/value -This paper is one of the first studies that apply the new M squared measure to evaluate the performance of international equity funds using both domestic and international benchmark indices. Various other performance metrics are also utilized including Sharpe and Treynor measures, and Jensen's Alpha.

Evaluation on international unit trust funds: A case for Malaysia

“…Last but not least, Arugaslan et al [1] on their studies evaluate the risk-adjusted performance of US-based international equity funds during the period 1994-2003. Their research show that the fund with the highest average returns may lose their attractiveness to investors once the degree of risk embedded in the fund has been factored into the analysis.…”

“…Out of the total samples selected (110 funds), 58 funds are dropped due to incomplete data, leaving 51 samples selected for this study 1 The return of the portfolio . The FBM Kuala Lumpur Composite Index (FBM KLCI) will be used as the benchmark for Malaysia market while Morgan Stanley Capital International (MSCI) Europe, Australasia and Far-East (EAFE) index for international market and Standard & Poor 500 index for US market.…”

Risk-Adjusted Performance of Malaysian Real Estate Investment Trust Funds

“…On the other hand, if the leverage factor of the REIT is greater than 1, this indicates that the REIT has a lower risk than the market and thus investors should increase the REIT investment by (L j -1) percentage through borrowing at the risk-free rate. Arugaslan et al (2008) and Low and Chin (2013) also employ the M-squared measure but in the context of equity unit trust funds. As emphasized by Modigliani and Modigliani (1997), although Sharpe ratio and M-squared measure produce the same fund ranking orders, both are very different risk-adjusted performance measures.…”

“…This is the first study that employs M-squared measure to evaluate REIT performance byshowing that leverage serves as important tool for investors in achieving optimal performance for a desired risk level. The M-squared measure has been employed by Low and Chin (2013) to evaluate Malaysian equity funds and by Arugaslan et al (2008) to assess the performance of international funds. As noted in these studies, although M-squared is a modified version of the Sharpe ratio, both are very different risk-adjusted performance measures.…”

Performance Evaluation of Investment (Mutual) Funds

“…Given the desire of investors to seek diversification in their asset portfolios and considering the modest perfor mance of the US equity markets since 2000, it is no surprise that many investors have sought to diversify their holdings by investing in international equity funds (Arugaslan et al 2008).…”