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This is a summary of “Factor Exposure Variation and Mutual Fund Performance,” by Manuel Ammann, Sebastian Fischer, and Florian Weigert, published in the Fourth Quarter 2020 issue of the Financial Analysts Journal.


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Mutual fund managers who frequently change exposure to investment factors (market, size, book-to-market, and momentum) perform significantly worse than those who make fewer changes.

How Do the Authors Tackle the Issue?

The authors investigate whether differences exist between funds with high factor exposure variation (FEV) and those with low FEV. First, they develop an FEV Indicator that standardizes and averages the individual exposures to the four factors.

They then analyze the performance differences between funds with high FEV and low FEV by looking at data from a sample of 3,816 US equity funds over the period from late 2000 through 2016. The data include information on the funds’ age, the tenure of management, fund expenses, investment flows into/out of each fund, and total assets under management, as well as the performance of the funds. All funds analyzed have at least $15 million in assets and 70% or more exposure to equities.

The authors also analyze whether fund managers were deliberate in their pursuit of FEV. They do so by examining the links between FEV and investor fund flows and forced trading and by looking at holdings that are themselves volatile in their factor exposures.

What Is the Investment Issue?

Does varying the exposure to investment factors (market, size, book-to-market, and momentum) have an effect on the performance of a mutual fund?

What Are the Findings?

Funds that vary their factor exposure the most tend to underperform, while those that vary their factor exposure the least outperform. “A portfolio of the 20% of funds with the highest FEV Indicator underperforms the 20% of funds with the lowest FEV Indicator by risk-adjusted 147 bps per year,” state the authors—a result significant at the 1% level.

The authors also conclude that neither volatile holdings nor investor fund flows explain the high-FEV group’s underperformance. Instead, they determine that high FEV is a deliberate decision on the part of the managers to actively manage their portfolios. “Fund managers voluntarily attempt to time factors, but they are unsuccessful at doing so,” conclude the authors.

The authors find that longer serving managers exhibited higher FEV than those with short tenure. They suggest this is because younger, less experienced managers are concerned about underperforming early in their careers and therefore avoid making risky bets.

High FEV also shows “economically significant associations” with higher fund expenses and greater portfolio turnover.

What Are the Implications for Investors and Investment Managers?

Investors can use the FEV Indicator to assess whether a fund manager frequently changes factor positioning of investments and hence the likelihood that he or she will perform better or worse. “Our findings do not support the hypothesis that deviations in factor exposures are a signal of skill, and we recommend that investors should carefully take our results into account before investing in funds with high FEV,” state the authors.

About the Author

Simon Constable

Simon Constable is an Edinburgh-based journalist.