Do Equity Mutual Funds Really Perform Less Poorly in Bad Times? Evidence from US and Australia

We find that in Australia, Mid/Small-cap funds often have significantly positive net alphas and this is driven by their strong performance in down-markets. In contrast Large-cap funds often have significantly negative net alphas and this is driven by their relatively poor performance in up-markets which cannot be offset by their performance in down-markets. We also find that Australian Large-cap funds generally reduce their market betas in down-markets while Australian Mid/Small-cap funds generally increase their market betas in down-markets. In the US, funds in all categories generally perform strongly in up-markets but perform poorly in down-markets which leads to negative unconditional alphas being observed. We also find that many US mutual funds increase their beta in down-markets which contributes to their poor performance in down-markets. In the US, funds also tend to perform relatively strongly in non-recessions but poorly in recessions. Despite the fact that these funds reduce their market betas in recessions they still do not achieve positive alphas in those periods