Essays on Actively Managed Mutual Funds

In this dissertation, I examine three main issues in mutual fund research: 1) the performance of "sector funds" over the business cycles; 2) the performance and managerial characteristics of "focus funds" and finally 3) the impact of taxes and tax overhang on flow of funds & performance of "corporate bond funds". My first essay analyzes the performance of sector funds across different stages of business cycles. Using a sample of 1,488 sector funds over the period 1990 to 2005, I demonstrate that sector funds perform differently across different stages in the business cycles. Average difference between expansion and recession cycles ranges from 2.75 percent per year to 3.78 percent per year. Findings of this essay further suggest that sector funds do exhibit different timing effects across recessions and expansions. Flow of funds and buy turnover ratio have differential effects across business cycles whereas sell turnover trading activities have a negative effect on funds' overall performance. My second essay analyzes the performance of "focus funds". These funds are well managed but tend to keep 50 or less stocks in their portfolio. Using a sample of 926 focus funds that existed during all or part of the period 1997 to 2006, I find that on average focus funds do not outperform a corresponding passive benchmark. My results further indicate that focus funds that are more concentrated in their top holdings, have larger net asset size, relatively young management and lower turnover ratios may offer higher abnormal returns compared to passive benchmarks. The third essay analyzes the effect of taxes and tax overhang on the flow of funds and performance in bond funds. Using a sample of 741 corporate bond funds that existed at some time during the period 1997 to 2006, findings of this essay indicate that new investors to bond funds are sensitive to unrealized capital gains/losses, however, the flow of funds is not affected by past dividend distributions. Findings further indicate that tax liabilities, unrealized gains/losses, and managerial tenure explain post-tax abnormal performance after controlling for investment style, and other known factors that explain the pre-tax performance ofbond funds.