Performance Evaluation of Global Equity Managers
Advisor:Karolyi, G. Andrew
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Publisher:The Ohio State University
Series/Report no.:The Ohio State University. Department of Finance Honors Theses; 2009
How does a “flat” world affect the global investment landscape? Historically, institutional equity managers have been separated into two groups: US and non-US. Managers with a US mandate typically only invest in stocks domiciled in the US, whereas managers with a non-US mandate only invest in stocks domiciled in other countries. However, there is a relatively new set of managers, known as global equity managers, who invest in both US stocks and non-US stocks. Many institutional investors see promise in global equity strategies for the following reasons: 1) If a money manager has skill, then a mandate with less investment restrictions will give the manager more opportunities for alpha (or risk-adjusted returns), and 2) The globalization of world economies yields increasingly correlated stock markets, making the distinction between US and non-US stocks increasingly arbitrary. The set of global managers is small but growing as plan sponsors look for ways to increase risk-adjusted returns. We obtain data on 3650 US managers, 1745 non-US managers, and 287 global equity managers from Wilshire Compass, a popular database used by one third of the top 50 pension funds. To evaluate each manager’s performance we analyze the excess returns using a risk model based on a series of common factors, consistent with the literature on mutual fund performance evaluation. These risk factors account for exposures to the market risk, to value-oriented risks, to small cap-oriented risks, and to momentum-oriented risks. Statistical regression results provide little evidence to support the idea that global equity managers can outperform the market on a risk-adjusted basis. We also analyzed the ability of global managers to time the markets—unlike US or non-US managers, global equity managers can shift their portfolio weights into different regions they think will perform relatively well. We found no evidence of timing ability in our sample of global mangers. Finally, global managers who perform well in one sub-period (when adjusting for risk) do not demonstrate significant skill in subsequent periods. In fact, we find that the best global equity managers tend to reveal even less reliable performance persistence than the best US and non-US managers.