Read the following summary from Tapver (2023) "Luck and skill in the performance of global equity funds in Central and Eastern Europe". [author is from our department]

Read the summary, and select below all that is correct according to this summary.

Understanding Fund Performance in Central and Eastern Europe: A Research Summary

Research Question and Justification

The researchers sought to answer a fundamental question: Do fund managers in Central and Eastern Europe (CEE) possess genuine skill, or are their performance results merely due to luck? Studies from developed markets like the US and UK (such as those by Kosowski et al., 2006; Cuthbertson et al., 2008; Fama and French, 2010) have generally found that only a small minority of funds demonstrate true skill, with most positive performance attributable to luck. However, these findings may not apply to emerging markets like CEE, where rapid market growth might not be matched by equally rapid improvement in fund manager skills. The CEE region has experienced higher growth than other emerging markets, with stock market capitalization growing at 8.51% per annum during 2016-2020, making it an important area to study.

Data Description

• Time Period: September 2005 to December 2019 (including analysis of a post-financial crisis period from May 2009 to December 2019)
• Sample: 175 actively managed open-ended equity mutual funds that invest globally
• Location: Funds incorporated in CEE countries that are part of the European Union (including Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia, and Slovenia)
• Fund Types: The study focused exclusively on actively managed global equity funds and excluded passive index funds

Fund Returns Performance

Alpha refers to the excess return a fund generates compared to a benchmark or market index. It's a measure of a fund manager's ability to beat the market through skill rather than just following general market trends.

• Gross Alpha (returns before fees): The average fund in the sample delivered alpha close to zero (-0.04% for the whole period and -0.01% for the post-crisis period). This means that before accounting for fees, most funds performed at approximately the same level as their benchmark indexes.

• Net Alpha (returns after fees): The mean net alpha was approximately -0.23% per month for the whole period, and -0.20% per month for the post-crisis period. This negative performance indicates that after accounting for management fees, the average fund underperformed its benchmark.

Most Funds Don't Outperform the Market

The study found that only one fund out of 175 consistently demonstrated the ability to beat the market through skill. This top-performing fund delivered a net alpha of 0.21% per month (or 2.51% per year) over the study period. The overwhelming majority of funds either couldn't beat their benchmarks or did so only through luck rather than skill. Even when looking at performance after the 2008 financial crisis, the results remained similar, with very few funds showing genuine ability to outperform consistently.

Skill vs. Luck

The researchers found that about 5% of funds showed skill when measured before fees, but after accounting for management fees, only the top fund maintained its advantage. This suggests that while some fund managers in CEE do possess skill, the fees they charge typically absorb all the extra value they create.

For funds with negative performance, the results were particularly telling. Most underperforming funds showed poor results due to lack of skill rather than just bad luck. This finding differs from studies in developed markets, where underperformance is often attributed to bad luck. The results suggest there may be a shortage of skilled fund managers in the rapidly growing CEE region.