Academic journal article Academy of Accounting and Financial Studies Journal

The Performance of US International Funds during the Asian Financial Crisis

Academic journal article Academy of Accounting and Financial Studies Journal

The Performance of US International Funds during the Asian Financial Crisis

Article excerpt


The objective of this study is to examine the performance and investment strategies of the US managed foreign equity mutual funds during the Asian Financial Crisis period. Our findings indicate that a high geographic concentration strategy contributes to excess returns, even after controlling for various fund characteristics including tenure and expense ratio. However, these actively managed funds do not demonstrate superior performance against a passively managed bogey portfolio during the 1997 Asian Financial Crisis.


The Asian Financial Crisis in 1997 affected many Asian countries including Thailand, South Korea, Indonesia, Malaysia, Taiwan, Singapore and Hong Kong. While some countries recovered faster than the others, most of them suffered substantially and their financial markets took a sharp decline during the 1997-1998 period. Kho and Stulz (2000), and Chowdhry and Goyal (2000) examine the banking industries of these Asian countries during the crisis and conclude that the effectiveness of the IMF programs is limited. Ang and Ma (2001) study the market crashes in four Asian economies and show that analysts fail to adjust their forecasts after these markets crashed. Chakrabarti and Roll (2002) show that volatility contagion in terms of covariance, correlation and volatility between European and East Asian countries increase significantly during the Asian crisis.

In recent years, total net asset value of international funds has grown tremendously. The popularity of global investing lies very much in the advocacy of benefits of international diversification among portfolio managers though the findings remain to be controversial (see for example, Solnik (1974) and Speidell and Sappenfield (1992)). Earlier studies on global investing such as Cho, Eun and Senbet (1986) generally examined the benefits of international diversification from the perspective of degree of integration of the world market. As the benefits of international diversification rely on the correlation structure of market returns, from various countries, performance of international mutual funds provides a basis for further tests on international investing (see Cumby and Glen (1990), and Droms and Walker (1994)). Recent research, however, has shifted to identify the important determinants in achieving superior returns when investing globally.

Among those diversified international funds, some managers may "actively" manage the portfolios by concentrating on selected securities, industry sectors, or regions, while some may follow more passive strategies by "indexing." It is obvious that in order to earn above-average returns, fund managers have to possess superior skills in security selection and market timing. However, prior research on international mutual funds (see Cumby and Glen (1990), Eun, Kolodny and Resnick (1991), and Kao, Cheng, and Chan (1998)) do not find supportive evidence that international fund managers are good market timers or stock pickers. Nevertheless, Capaul (1999) found that for industry-specific equity portfolios, certain investment strategies earned above-average returns with varying degrees of significance when compared with equally-weighted and market-cap weighted indexes.

An interesting topic related to the Asian financial crisis is the performance of the US mutual funds investing in the foreign markets during the crisis period. A prudent international fund manager needs to decide the composition of countries and securities of the portfolio. Strategic asset allocation would be challenging if the regions being invested happen to be in a financial crisis. Consequently, fund managers investing in international market including Asian countries face a very difficult task during the Asian financial crisis period.

In this paper, we examine the performance of foreign equity funds in relation to their fund characteristics, management attributes, and investment strategies. …

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