Does Industry Size Matter? Revisiting European Mutual Fund Performance

This paper revisits the performance of European mutual funds using a more recent and extensive survivorship bias free database of 16,055 equity funds over the 1992-2006 period. Earlier evidence by Otten & Bams (2002) pointed to an exceptional position of European mutual funds. In sharp contrast to for instance the United States, the authors documented that European mutual funds were able to add value, based on their positive alphas. Otten & Bams (2002) contributed that ability to the relative small size of the European mutual fund industry compared to the total stock market (around 13% in 1998). By 2005 this size has almost doubled to 25%. The main motivation for our study is to examine whether this had an impact on the ability of European mutual funds to beat the market. Our main results are four-fold. First, we indeed find that European mutual funds deliver significantly negative 4-factor Carhart alpha's during this more recent period. The larger current size of the European mutual fund industry makes it more difficult for managers to add value. These results are now more in line with earlier results for US funds. Second, passive funds perform even worse than active funds, leaving us with a puzzle. It might be that passive funds are not pure indextrackers but active funds in disguise. Third, adding back TER's and loads make most alphas insignificantly different from zero. Which means that European fund managers are able to follow the market but charge investors too much for this. Fourth, we find strong persistence in performance in all investigated countries over both 6 and 12 month holding periods