Our finding that global equity fund managers outperform their benchmark indexes, on average, is broadly consistent with the one-factor market model results of Busse et al. (2014), who reported a quarterly alpha of 0.405% (t = 1.89; about 1.6% a year) for their sample of global and international institutional equity funds. We uncovered two important sources of outperformance: stock selec¬tion, notably including developed markets, and emerging markets, where market selection also makes a meaningful contribution to outperfor¬mance. Nevertheless, the contribution to overall portfolio performance from emerging markets is modest because they account for only a small por¬tion of fund portfolios.
The attribution shows that currency effects have a mixed impact on fund returns, which, if anything, tend to be marginally negative. This finding sug¬gests that most equity managers either do not possess currency selection skill or ignore currency altogether, thus leaving their portfolios exposed to the risk of incidental losses related to currency translation. This finding also reinforces the case for managing currency exposures outside global equity portfolios, through either a hedging pro¬gram or a currency overlay.
The low level of unobserved effects (time-series average of 0.05%; pooled average of 0.00%) sug¬gests that our holdings-based portfolio returns are a good representation of actual quarterly fund returns—in contrast to the US literature, in which holdings-based returns are typically higher than reported returns (Wermers 2000), largely because transaction costs are ignored. The fact that our holdings-based return estimates equal or exceed reported portfolio returns implies that reported returns must be boosted by positive unobserved effects that more than offset transaction costs, such as value-accretive intraperiod trading (see Puckett and Yan 2011). Another possibility is unobserved exposures with positive effects, including any currency hedging or derivatives.
We focused our analysis on excess returns rela¬tive to the benchmark, without any further risk adjustment, which leaves open the possibil¬ity that the excess returns we observed could arise from exposure to common factors, such as momentum, value, or size. In an unreported analysis, we performed a time-series regression19 of reported excess returns on the global versions of the Fama–French factors (market, size, value, and momentum) from Ken French’s website.20 We conducted this analysis for a subset of 62 funds with the US dollar as their base currency and at least 20 quarters of return data. The analysis is only indicative, given the limited fund sample and the fact that the Fama–French factors are formed from 23 developed markets.21 Nevertheless, the average regression intercept is 0.4% (around 1.6% a year) and statistically significant, tentatively sug¬gesting that our findings are robust after allowing for exposures to common factors. The regression coefficients reveal that funds in the subsample have an average market beta of slightly less than 1 and a positive and statistically significant exposure to small stocks. A positive exposure to value and a negative exposure to momentum are also observed, although both are small and not statistically significant. Overall, we surmise that exposure to small stocks may have contributed to benchmark-adjusted outperformance, but the contribution is insufficient to negate the evidence that global funds possess stock selection skill.
This figure shows the average active weights in each region for funds assigned to the MSCI World Index. DM indicates a developed-market region. The three emerging-market regions have been combined and are identified as “Emerging Markets.” 
This figure shows the average active weights in each region for funds assigned to the MSCI All Country World Index (MSCI ACWI). DM indicates a developed-market region. The three emerging-market regions have been combined and are identified as “Emerging Markets.”
