The performance of the Italian mutual funds: Does the metric matter?

• The performance metrics of mutual funds should be consistent with the assessment's objectives and investor's perspectives.
• The time-weighted approach is only theoretically not influenced by the distribution of flows during the year.
• Distinguishing fund manager's performance from investor's does not make sense when sellers dominate and production and distribution are vertically integrated.
• In some realistic scenarios (simulated on the basis of the Italian fund industry dynamics), the metrics matter: the spreads between time-weighted and money-weighted metrics are mainly influenced by amount/volatility of flows as well as timing/volatility of returns.

This paper discusses the differences among performance metrics in the Italian mutual fund industry. This industry is worthy of interest because it presents two characteristics (representative of other Continental Europe countries, less analyzed than Anglo-Saxon ones) that weaken the importance of the time-weighted approach: a dominant role of the sellers and a significant vertical integration between production and distribution. Based on an original dataset, never used before by any scholar, we simulate (by using a Monte Carlo simulation model) the dynamics of returns and cash flows in the 2003–2010 period, analyzing the metric spreads and their sensitivity to scenarios’ characteristics (volatility and timing of returns, entity and volatility of subscriptions and withdrawals). The empirical findings suggest that metrics matter. In fact, spreads between time-weighted and money-weighted returns are significant at level of individual funds in the simulated scenarios (consistent with the dynamics of the Italian industry in the considered period), while are not significant when we consider aggregated data, since aggregation smooths the volatility of flows and returns. The analysis suggests that it would be useful: (i) to rethink asset managers’ choices in terms of performance measurement; (ii) to provide all the measures of return that could satisfy the broad spectrum of interested parties and assessment purposes.