Performance of Foreign and Global Mutual Funds: The Role of Security Selection, Region‐Shifting, and Style‐Shifting Abilities

Date01 November 2015
Published date01 November 2015
The Financial Review 50 (2015) 517–545
Performance of Foreign and Global Mutual
Funds: The Role of Security Selection,
Region-Shifting, and Style-Shifting Abilities
Hui-Ju Tsai
Washington College
Yangru Wu
Rutgers University
We examinethe performance of U.S.-based foreign and global funds after controlling for
their regional and style exposure. We show that, on average, the total performance (TP) and
security selection abilities of both foreign and global funds are significantly negativeand exhibit
short-term predictability.Additionally, R2reflects funds’ security selection abilities, consistent
with previous findings for domestic mutual funds. Investors can earn higher abnormal returns
and TP in the short run by purchasing past winners with low R2than by purchasing past losers
with high R2. However,there is no evidence of predictability in the funds’ region-shifting and
style-shifting abilities.
Corresponding author: Department of Business Management, Washington College, 300 Washing-
ton Avenue, Chestertown, MD 21620; Phone: (410) 778-6378; Fax: (410) 778-7891; E-mail: htsai2@
We thank the editor, Bonnie Van Ness, the anonymous referees, and the conference participants at the
2015 annual meeting of the Southwestern Finance Association for helpful comments and suggestions.
Wu thanks the Whitcomb Center for Financial Services at the Rutgers Business School for data and
financial support. Part of this work was completed while Wuvisited the Central University of Finance and
Economics. We are responsible for anyremaining errors.
C2015 The Eastern Finance Association 517
518 H.-J. Tsai and Y.Wu/The Financial Review 50 (2015) 517–545
Keywords: global and foreign funds, performance persistence, region-shifting abilities, style-
shifting abilities, security selection abilities
JEL Classifications: G11, G15, G20
1. Introduction
The importance of U.S.-based foreign and global funds can be seen from their
increasing popularity among investors over the past decade.1From 2000 to 2012,
U.S.-based world equity fund assets grew from $553 billion to $1614 billion, with
an average annual growth rate of over 9%. In 2012, U.S.-based world equity funds
accounted for about 12% of total U.S. mutual fund assets (ICI, 2013). The popularity
of foreign and global funds can be attributed to the diversificationbenefits they provide
to investors (Grubel, 1968; Levy and Sarnat, 1970; Eun, Kolodny and Resnick, 1991;
Detzler and Wiggins, 1997). Additionally, some investors believe that international
equity markets are less efficientand thus allow skilled fund managers to earn abnormal
returns (Tkac, 2001).
While there are considerable studies on the performance of domestic mutual
funds (e.g., Grinblatt and Titman, 1992; Carhart, 1997; Daniel, Grinblatt, Titman and
Wermers, 1997; Wermers, 2000; Brands, Brown and Gallagher, 2005; Kacperczyk
and Seru, 2007; Cremers and Petajisto, 2009; Amihud and Goyenko, 2013), research
on the performance of foreign and global funds is not as extensive (Cumby and Glen,
1990; Gallo and Swanson, 1996; Glassman and Riddick, 2006; Jiang, Yao and Yu,
2007; Turtle and Zhang, 2012). Furthermore, current evidenceabout the performance
of foreign and global equity funds is mixed. For instance, Cumby and Glen (1990) use
Jensen’s alpha and positive period weighting measure to compare the performance
of 15 U.S.-based internationally diversified mutual funds to a broad market index
and do not find evidence of positive abnormal returns. Similarly, Breloer, Scholz and
Wilkens (2014) and Comer and Rodriguez (2012) find negative average abnormal
returns earned by foreign and global funds. By contrast, Detzler and Wiggins (1997)
find that international mutual funds outperform the inefficient world index.Gallo and
Swanson (1996) show superior performance of international mutual funds. Fan and
Addams (2012) and Fortin and Michelson (2005) also find some evidence of superior
performance of U.S.-based foreign funds.
Current studies on foreign and global fund performance typically use the single
global equity index as a benchmark. However, Comer and Rodriguez (2012) show
that foreign and global funds have a wide variety of risk exposure across regional
markets and more importantly, their risk exposure can be quite different from that of
1U.S.-based foreign funds are different from global funds in that the latter have much higher exposure to
the U.S. market.

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