Conditional Performance Evaluation for German Mutual Equity Funds

We investigate the performance of a sample of German mutual equity funds overthe period from 1994 to 2003. Our general finding is that mutual funds, on average,hardly produce excess returns relative to their benchmark that are large enough tocover their expenses. This conclusion is drawn from a variety of model specificationsand is robust to many different benchmarks. Compared to unconditionalmeasures, fund performance substantially deteriorates when we measure conditionalalphas both in single-index and multi-factor models. We also measure fundperformance in the Euler-equation framework and test several specifications of thestochastic discount factor using GMM. The result that funds underperform even beforecosts is even more pronounced. Overall, given the fact that stock returns are tosome extent predictable by using publicly available information, conditional analysisraises the hurdle for active managers seeking abnormal positive performance,because it gives them no credit for exploiting readily available information.