The Performance of Open-End International Mutual Funds

1 Federal Reserve Bank of Atlanta E C O N O M I C R E V I E W Third Quarter 2001 diversify their portfolios into foreign markets. Indeed, the net new cash flow into international funds in 2000 was $49.9 billion (ICI 2001). Most advocates of international investing focus on the diversification benefits of adding assets that have relatively low correlations with domestic stock portfolios. Another suggested benefit of international investing, commonly alluded to in the popular press, is that professional fund managers can earn abnormally high returns in international equities because of the relative inefficiency of these markets.1 However, there is little evidence on the validity of this assertion. This article takes a step toward filling this gap by studying the performance of a large sample of open-end international mutual funds during the 1990s. Employing a set of performance measures commonly used in the academic and professional evaluation of mutual funds, this study characterizes the distribution of returns earned by investors. Rather than answering the question of whether there are exploitable foreign market inefficiencies, the results here set the stage for such an investigation by demonstrating the extent to which fund managers earn abnormal returns, if at all, and, if so, whether there are any statistically significant relations between the type of international fund and abnormal performance. At the same time, the analysis allows for scrutiny of commonly accepted “street lore.” For example, are emerging markets funds more volatile than developed markets funds? Do they earn higher average returns? Most previous evidence on these types of questions is based on studies of foreign market indexes rather than managed mutual funds. Thus the extent to which such evidence applies to funds, and therefore matches the experience of fund investors, is an open empirical question.2