Thinking Globally Has Investor Benefits, Professor Finds
More than 90 million Americans invest in mutual funds, making them the second-largest U.S. financial institution. Abhay Kaushik, assistant professor of finance in Radford University's College of Business and Economics (COBE), has found that investors holding funds focused on the global market, despite its tumult, might have better-performing investments.
In a recent article in the journal Banking and Finance Review, Kaushik writes that funds based in the United States that are focused on emerging markets outperformed those focused domestically as reflected in the risk/reward, or Sharpe, ratio. His article, titled "Flow of Fund and Abnormal Performance of Emerging Market Equity Funds: Is It Simply the Market Attraction or the Real Deal?" analyzed 56 unique emerging market equity funds from 2000 to 2010. In a related study to be published in a forthcoming edition of the Journal of Investing, Kaushik analyzes 570 actively managed U.S.-based funds that invest mainly in international equities. Findings of this study show that U.S. funds that mainly invest in international equities beat their passive benchmarks.
"Americans really depend on mutual funds for savings and income generation," Kaushik said. "Mutual funds provide the retail investor diversification and professional management at affordable costs."
Kaushik said his research is focused on providing analytic information of value to unsophisticated investors who have the abilities but not necessarily the time or expertise. Results of his recent study show that, on average, U.S.-based funds that invest mainly in emerging markets earn positive risk-adjusted return based on one-to-one comparison of their risk-adjusted returns. The results of Kaushik's cross-sectional analysis show that risk-adjusted return can also be affected by other factors like portfolio rebalancing and investment timing.
Finally, funds are heavily influenced by earlier returns. "A fund that is successful attracts new money, and that new money can start a bandwagon of popularity that affects a fund's performance," Kaushik said.