Performance, stock selection and market timing of the German equity mutual fund industry

We investigate the performance of the German equity mutual fund industry over 20 years (monthly data 1990–2009) using the false discovery rate (FDR) to examine both model selection and performance measurement. When using the Fama–French three factor (3F) model (with no market timing) we find that at most 0.5% of funds have truly positive alpha-performance and about 27% have truly negative-alpha performance. However, the use of the FDR in model selection implies inclusion of market timing variables and this results in a large increase in truly positive alpha funds. However, when we use a measure of “total” performance, which includes the contribution of both security selection (alpha) and market timing, we obtain results similar to the 3F model. These results are largely invariant to different sample periods, alternative factor models and to the performance of funds investing in German and non-German firms — the latter casts doubt on the ‘home-bias’ hypothesis of superior performance in ‘local’ markets.

► We examine the performance of German equity mutual funds using the false discovery rate.
► Using more than 500 German mutual funds over the period January 1990 to December 2009
► We find that 0.5% of funds have truly positive and 27% have truly negative-alpha performance.
► The false discovery rate is high for winner funds and low for loser funds.
► Results on “total” performance are similar for different models, including market timing model.