Value Creation and Determinants of Equity
Thomas H. Payne
This study investigates performance-related factors across major equity
ences can vary across fund type and objective, we focus on
five major classifications of equity funds. Growth, aggressive
fund classifications. The results indicate that risk- and fee-adjusted returns
are generally enhanced by managerial tenure and fund size. Fund longev-
growth, growth and income, equity income, and balanced
funds are analyzed, and the results are compared.
ity is positively and significantly associated with the adjusted returns of
growth funds. However, value is diminished, by higher fees that do not
This study regresses fund-specific characteristics against
risk and expense-adjusted fund returns. Management tenure,
yield commensurate returns. Similarly, sales loads do not generally add
value to investors. In addition, funds with higher minimum purchase levels
fund longevity, and net asset value are positively related to
performance. The evidence also suggests that equity fund man-
do not seem to generate efficiency or gains for their investors.
1999. 45.69–74. 1999 Elsevier Science Inc. All rights reserved.
agers should work to reduce portfolio turnover and to reassess
the value added from activities that result in higher expenses.
In a widely cited early work on mutual fund performance,
Jensen (1968) examined 115 funds from the period 1945
or the last 30 years, researchers have addressed mutual through 1964. Consistent with the notion of efficient markets,
he found that expense-adjusted fund returns were significantlyfund performance and the value added by their manag-
ers relative to the market as a whole. A number of lower than those generated by randomly selected portfolios
of equivalent risk. These results confirmed the earlier findingsstudies have concluded that, after expenses, mutual fund man-
agers underperform the market. More recently, however, oth- of both Treynor (1965) and Sharpe (1966), thus forming a
basis for the early literature’s general conclusion that mutualers have suggested that fund managers have informational
advantages that allow them to outperform or at least equally fund performance is inferior to that available from risk-
adjusted index portfolios and that managers do not seem toperform the market after expenses. With mixed results, most
prior studies have addressed performance in terms of market have access to private information.
Several subsequent studies on the topic stand in contrastefficiency by examining the ability of mutual fund managers
to “beat the market.” Notwithstanding this efficiency-based to the early findings. Ippolito (1993) summarizes many of
these works, as well as his own, which generally suggest thatresearch, relatively few studies have provided insight into
specific organizational and managerial factors that make an mutual fund returns, after expenses, but before loads, are
equivalent or superior to those available from a risk-adjusted
impact on fund performance.
market index. These findings suggest that mutual fund manag-
We examine the issue of mutual fund performance, not
ers may have access to useful private information permitting
from the standpoint of market efficiency, but in terms of the
them to generate excess returns sufficient to cover fund ex-
specific characteristics that potentially affect returns. These
penses. The recent studies of Hendricks, Patel, and Zeckhauser
characteristics include: fund size, fund longevity, managerial
(1993) and Goetzmann and Ibbotson (1994) also support an
tenure, asset turnover, fees, sales loads, minimum investment,
inefficiency contention by concluding that past mutual fund
and managerial structure. In addition, because factor influ-
returns are useful in predicting future returns.
The recent work of Malkiel (1995) examines the returns
Address correspondence to Dr. Thomas H. Payne, School of Business Adminis-
tration, University of Tennessee at Martin, Martin, TN 38238, USA.
of all equity mutual funds from 1971 through 1991 and
Journal of Business Research 45, 69–74 (1999)
1999 Elsevier Science Inc. All rights reserved. ISSN 0148-2963/99/$–see front matter
655 Avenue of the Americas, New York, NY 10010 PII S0148-2963(98)00059-9