J. Fletcher International Review of Economics and Finance 8 1999 455–466 459
Table 1 Descriptive Statistics of Trusts
Special Situations All
Growth Income
Small Companies General
N 85
50 6
15 14
Excess return 0.5927
0.5118 0.685
0.4117 0.4518
Load 4.738
4.785 5.1667
5.0667 4.036
Annual 0.922
0.935 0.771
0.8833 0.982
Size 17.14
16.77 10
19.33 19.16
The table includes the mean excess return , average annual charge , average load charge , and average market value £m at the start of 1985 for the whole sample of trusts and the four investment
objectives Growth, Income, Special SituationsSmall Companies, and General. The number of trusts N within each investment objective is also included.
index obtained from BARRA’s Internet site, and the excess return on the Datastream US government bond index. This takes account of the fact that some trusts invest in
asset categories not included in the SP 500. This will be referred to as the 3-Factor model.
The conditional measures of performance are computed relative to the benchmark excess returns and the products of the benchmark excess returns and the information
variables. The following information variables were chosen because they have been found to be important in predicting US stock returns e.g., Keim Stambaugh, 1986;
Fama French, 1988. The information variables collected from Datastream are:
1. Monthly return on 13-weektender US Treasury Bills. 2. Dividend yield on the SP 500 index.
3. Difference between the monthly annualized yield of US 10-year Treasury bonds and yield on 13-week Treasury Bills.
4. January dummy, which equals 1 in the month of January and 0 otherwise.
4. UK American unit trust performance
4.1. Overall trust performance This section examines the unconditional and conditional performance of the trusts
relative to the two benchmark portfolios for the whole sample period. The performance of the trusts is estimated for each benchmark portfolio using Eqs. 1 and 2. In addition,
performance is evaluated by using market adjusted returns Mkt, which are simply the returns on the trusts minus the SP 500 returns. To evaluate the statistical
significance of the average abnormal performance of the trusts, the performance on an equally weighted portfolio of all trusts is estimated. This approach is adopted since
using standard t tests on the cross-sectional mean abnormal performance will be biased because of the impact of residual cross-correlation from Eqs. 1 and 2.
460 J. Fletcher International Review of Economics and Finance 8 1999 455–466
Table 2 Summary of Trust Performance
Unconditional Conditional
SP 500 3-Factor
Mkt SP 500
3-Factor a
2 0.248
2 0.051
2 0.222
2 0.065
0.0069 t
2 0.88
2 0.289
2 1.14
2 0.3
0.05 b
SP 500
1.03 0.531
b
small
0.515 b
bonds
2 0.039
N 1 ve 14
31 10
34 40
Sig 2
N 2 ve 71
54 75
46 40
Sig 4
Bonf
1
1 1
1 1
0.475 Wald
50 62
Bonf
2
0.01 0.01
The performance of the trusts is evaluated from January 1985 and December 1996 relative to two benchmark portfolios SP 500 and three index model [3-Factor] using the unconditional Jensen 1968
measure and the conditonal Ferson and Schadt 1996 measure. Performance is also calculated using the market adjusted returns Mkt. The first three columns refer to the unconditional measures and the
final two columns to the conditional measures. The table includes the abnormal performance with t statistic and the beta coefficients for the two unconditional models for the equally weighted portfolio
of all trusts. It also gives the number of trusts with either positive or negative performance and how many are statistically significant at the 5 level. The performance numbers are monthly. The Bonf
1
is the Bonferroni p value of the joint test of whether the performance across trusts are jointly equal to zero. The final two rows report the number of trusts with a significant Wald test at 5, which rejects
the hypothesis of constant conditional betas. The Bonf
2
p value is the Bonferroni p value of whether
the conditional betas are constant across trusts. The test statistics are corrected for heteroskedasticity using White 1980.
Table 2 reports summary statistics of trust performance. It includes the abnormal performance and t statistic for the equally weighted portfolio of trusts. The t test
examines the hypothesis that the abnormal performance of the equally weighted portfolio of trusts equals 0. The unconditional betas are reported for both benchmark
portfolios for the equally weighted portfolio of trusts. Table 2 also contains the number of trusts with positive and negative performance and those that are statistically
significant at 5. To ensure a sufficient number of observations to estimate the conditional measures of performance, a requirement that the trusts have a minimum
of 2 years monthly return observations was imposed. This implies that the conditional measures could only be estimated for 80 trusts. The Bonferroni p value provides a
joint test of the hypothesis that the performance of the trusts are jointly equal to 0.
7
The final two rows in Table 2 assess whether the conditional betas of the trusts are constant over time. This uses a Wald test, which examines if the slope coefficients
on the interaction terms between the information variables and the benchmark excess returns are jointly equal to 0. The second bottom row presents the number of trusts
where the hypothesis of constant conditional betas is rejected at 5. The final row
J. Fletcher International Review of Economics and Finance 8 1999 455–466 461
is the Bonferroni p value of the joint tests that the slope coefficients across trusts are jointly equal to 0. The test statistics have been corrected for heteroskedasticity using
White 1980. The evidence in Table 2 suggests that unit trusts exhibit abnormal performance
that is not significantly different from 0 at 5 significance level relative to the five models. The average abnormal returns of the trusts for the unconditional measures
on an annualized basis are 22.976 SP 500, 20.612 3-Factor, and 22.664 Mkt. The majority of individual trusts exhibit negative abnormal performance with
the unconditional measures. However, few are statistically significant at 5.
An inspection of the betas in the three index model suggests that smaller companies are an important asset category for unit trusts on average. This is perhaps not surprising
since the majority of trusts within the sample are growth oriented. It also explains the large numerical difference in the abnormal performance between the three index
model and the SP 500. Smaller companies tended to underperform the SP 500 over this period. This is consistent with the findings of Elton et al. 1993 and Gruber
1996, which included asset categories in the benchmark in which fund managers invest.
Using the conditional measures, the annualized average abnormal performance are 2
0.780 SP 500 and 0.828 3-Factor. The average performance of the trusts tends to improve when moving to conditional measures. However, the trusts are not
able to generate superior abnormal returns. The number of trusts with positive abnor- mal performance also increases. With the 3-Factor model, 50 of the trusts have
positive performance; however, only two trusts differ statistically from 0 at traditional levels. This does not change the inferences that unit trusts on average or individually
possess superior information. In addition, the Bonferroni p values are unable to reject the hypothesis that the a’s are jointly equal to 0.
The Wald x
2
test, reported in the second to last row, suggests that the assumption of constant conditional beta can be rejected for the majority of trusts. The hypothesis
of constant conditional betas can be rejected for 50 trusts for the SP 500 and 62 trusts for the 3-Factor model. Also, the Bonferroni p value rejects the hypothesis that
all trusts have constant conditional betas.
Table 3 explores the relationship between the abnormal performance of equally weighted portfolios of trusts grouped according to investment objective. The table
includes the abnormal performance of each portfolio with t statistics. In addition, the beta coefficients for the unconditional measures are reported.
Table 3 shows that the portfolios of the Smaller CompaniesSpecial Situations and Growth trusts register the poorest abnormal performance and that the Income portfolio
register the best abnormal returns. However, none of the abnormal returns are statisti- cally significantly different from 0 at the 5 significance level. In addition, the Bonfer-
roni p value unreported is unable to reject the hypothesis that the abnormal perfor- mance across the four portfolios are jointly equal to 0. This suggests that there is no
significant relationship between investment objective and abnormal performance.
The coefficients on the 3-Factor model in Table 3 suggest that the classifications used are reasonably informative. The Growth portfolio has a higher exposure to the
462 J. Fletcher International Review of Economics and Finance 8 1999 455–466
Table 3 Investment Objective and Trust Performance
Unconditional Conditional
SP 500 3-Factor
SP 500 3-Factor
Panel A Growth
2 0.257
2 0.071
2 0.0686
2 0.026
Income 0.00524
0.0699 0.135
0.097 Spec Sits
2 0.367
2 0.0291
2 0.123
0.055 General
2 0.194
2 0.0286
2 0.056
0.048 Panel B
Betas b
SP 500
b
SP 500
b
small
b
bonds
Growth 1.05
0.583 0.479
2 0.049
Income 0.702
0.407 0.278
0.185 Spec Sits
1.16 0.298
0.886 2
0.057 General
0.98 0.578
0.416 2
0.058 Panel A of the table includes the abnormal performance of equally weighted portfolios of trusts
sorted according to the investment objective of the trust. The investment objectives are Growth, Income, Special SituationsSmall Companies, and General. The performance of the trusts is evaluated from
January 1985 and December 1996 relative to two benchmark portfolios SP 500 and three index model [3-Factor] using the unconditional Jensen 1968 measure and the conditional Ferson and Schadt 1996
measure. The first two columns refer to the unconditional measures, and the second two columns refer to the conditional measures for the four categories of trusts. Panel B of the table includes the betas for
the two unconditional measures. The first column is the beta on the SP 500 model and the other columns are the betas on the 3-Factor model.
SP 500 and small stock index than the Income portfolio. The Small Companies Special Situations has the largest exposure to the small stock index. The Income
portfolio has a lower exposure to these two indices and higher to the bond index. The greater exposure of the Growth and Small Companies portfolios to the small
stock index explains the poorer abnormal performance of these trusts to the SP 500 since small companies have performed poorly over this period.
4.1. Trust characteristics and performance The previous section found that unit trusts are unable to generate superior abnormal
returns on average. This section examines the relationship between various trust characteristics and abnormal performance. Three factors are considered:
1. Size of trust 2. Initial load charge
3. Annual charge
Of particular interest is the relationship between charges and performance. Since the returns used are gross of the load charge and other trading costs but net of the
annual charge, there should be no relationship between the load charge and perfor- mance if markets are efficient. The relationship between annual charges and perfor-
mance is more difficult to specify since returns are net of the annual charge but gross of trading costs. If annual charges are positively correlated with trading costs, then
J. Fletcher International Review of Economics and Finance 8 1999 455–466 463
Table 4 Performance and Trust Characteristics
Unconditional Conditional
SP 500 3-Factor
SP 500 3-Factor
Load 0.000041
0.000092 0.000047
2 0.00015
t 0.14
0.31 0.16
2 0.58
Annual 2
0.00063 2
0.00046 2
0.00077 2
0.00019 t
2 0.5
2 0.37
2 0.61
2 0.16
Size 2
0.00000005 2
0.0000079 2
0.0000076 2
0.000012 t
2 0.055
2 1.08
2 0.93
2 1.78
Monthly cross-sectional regressions are estimated of the abnormal returns of the trusts on a constant and the trust characteristics of load charge, annual charge, and size between January 1985 and December
1996. The performance of the trusts is evaluated relative to two benchmark portfolios SP 500 and three index model [3-Factor] using the unconditional Jensen 1968 measure and the conditional Ferson
and Schadt 1996 measure. The table includes the mean of the monthly slope coefficients and the Fama and MacBeth t statistics. The first two columns refer to the unconditional measures and the second two
columns to the conditional measures.
there should no relationship between annual charge and performance if markets are efficient. This implies that net abnormal returns will be lower for trusts with higher
annual charges because of the higher trading costs. An alternative view is advanced by Grossman and Stiglitz 1980, where informed investors are able to generate higher
abnormal returns to compensate for higher charges.
A number of US mutual fund studies have examined the relationship between mutual fund characteristics and performance. Ippolito 1989 found no relationship
between expenses and performance using net returns. Grinblatt and Titman 1994 observed a positive relationship between performance and the turnover of the fund.
However, Elton et al. 1993 discovered a negative relationship between performance and expense ratios. This was confirmed by Malkiel 1995. Carhart 1997a found that
expenses and turnover have a negative impact on performance, and Carhart 1997b suggested that the positive findings in Grinblatt and Titman 1994 are likely to be
due to survivorship bias.
The relationship between trust characteristics and performance is evaluated using cross-sectional regressions. Each month cross-sectional regressions are estimated from
the performance measures a plus monthly residual on a constant and the trust characteristics. The mean of the monthly coefficients are taken as the final estimate
and t statistics are calculated as in Fama and MacBeth 1973. Table 4 reports the slope coefficients and Fama and MacBeth 1973 t statistics for each benchmark.
Table 4 shows that each of the trust characteristics is unrelated to the abnormal performance of the trusts. This is the case regardless of the benchmark used. The
most interesting result is the absence of a significant relationship between abnormal performance and either the load or annual charge. This is consistent with the view
that trusts with higher charges tend to be unable to deliver superior performance, consistent with Elton et al. 1993 and Malkiel 1995.
A further issue results unreported that was considered was the relationship be-
464 J. Fletcher International Review of Economics and Finance 8 1999 455–466
tween abnormal performance and the proportion invested in the US. The trusts were assigned to three groups according to the proportion invested in the US recorded in
the 1985 Unit Trust Yearbook. The groups were greater than 95, between 85–95. and between 70–85. Each trust was given a dummy variable depending on which
group they were in, and cross-sectional regressions were estimated as before. None of the groups had a significant relationship with abnormal performance, which suggests
performance is unrelated to the proportion invested in the US.
4.3. Predictability of trust performance This section examines whether trust performance is predictable over time. If perfor-
mance is partly predictable, then it should provide some justification for the usefulness of performance league tables. Recent research has shown that mutual fund perfor-
mance does exhibit some persistence see Hendricks et al., 1993; Brown and Goetz- mann, 1995; Elton et al., 1996. Evidence in Carhart 1997a suggests that most of
the positive persistence in US fund raw returns and risk-adjusted returns can be explained by a failure of the performance measure to adjust for momentum trading
strategies and differences in expense ratios and transactions costs.
The performance persistence of the trusts is examined with a simple test. At the start of each year all trusts are ranked on the basis of their cumulative excess returns
over the previous year and grouped into quartile portfolios. Equally weighted monthly excess returns are then estimated over the next year. All trusts that exist at the start
of the year are included in the portfolios. This is repeated each year. Table 5 reports the abnormal performance of the four quartile portfolios and the portfolio that is
long in the Winners portfolio and short in the Losers portfolio evaluated between January 1986 to December 1996 relative to each benchmark portfolio.
Table 5 reveals no evidence that there is persistence in performance for this sample of trusts. The annualized mean difference in excess return between the top and bottom
quartiles is only 20.696. In addition, the abnormal returns between the top and bottom quartiles is fairly small except for the 3-Factor conditional measure. The
Winners portfolio earns slightly more than the Losers portfolio for the unconditional measures and less with the conditional measures. However the abnormal performance
is not statistically significant at traditional levels. This is consistent with market effi- ciency that the past performance of a trust is unable to generate superior abnormal
returns.
5. Conclusions
