What is a well-performing mutual fund?

Apparently I may have had misunderstanding about how to define a well-performing mutual fund, that today I learn from my lectures that there are two sides to study if a mutual fund is a well-performing one: one is selectivity, the other is if the fund is following the market. There is a simple regression model to exam the performance of a mutual fund:

Once α>0 and β>0, the mutual fund is considered as a well-performing mutual fund. The term, , represents the return of the fund; and the term, , represents the return of the market. The estimator, β, represents the risk of the fund; usually when the market is performing well, a mutual fund is likely to hold more assets with higher risk levels, and vice versa; it also represents how well the fund is able to adapt to the market environment. The estimator, α, represents the return of the fund when the market return is zero, and is able to represent the ability of the fund manager.

However, this rule may not apply to other types of funds. Mutual funds cover many different types of assets; however, some types of funds do not cover such wide range of assets, and they also aim to boost their returns by conducting risky investment strategies. The assessment would be different, because when focusing at growth or other types of investment strategies (PE, hedging, quant) rather than value, the ideologies are different from managing a mutual fund.

Buying mutual funds may use this rule; however, when conducting private investment or managing other types of investment, this rule may not be appropriate to use. In addition, some studies find that funds are not selective that α is statistically insignificant.

Balance between consumption and investment

It is almost impossible for an economy to focus on both consumption and investment as there is a constraint to resources. Once a country wants to boost its consumption, the resources would be used for boosting consumption rather than investment. Though consumption or investment has its multiplier effects, the proportions of spending on consumption and investment are different and their impacts on the economy are also different.

The returns from consumptions and investment may not intervene with each other. Spending on consumption may not have effects on the investment, spending on investment may not have effects on the consumption. Usually people believe that increasing consumption can lead to more demand in the market, thus companies would boost their supply via increasing their investment. However, increasing in investment does not boost the market supply or the companies’ productive capacities immediately, as investment has lagged effects. Therefore, when more is spent on consumption, it may increase companies’ investment; however, investment decisions are made based on companies’ expectations about the future, if they are uncertain about if the future market still needs such demand, they may not invest in boosting their production. In addition, companies also make their investment decisions based on their expectations about their individual sectors’ future performance.

Especially when the government is trying to direct the economy, the sources spent on the consumption could hardly be spent on achieving the goals of boosting investment and boosting consumption at the same time.

Inflation, hyperinflation and economic crisis

My belief is that inflation is good for economic growth, as when people expect there is inflation in the future, people are likely to spend more of their wealth in consumption and investment, which help to speed up economic growth. This may imply when there is higher inflationary pressure, the marginal propensity to consume and invest is very likely to increase, this can lead to higher economic growth rate. However, when there is hyperinflation, the economy is definitely in its recession and the market is almost impossible to solve the problem by itself. When Germany experienced its hyperinflation in late 1920s, its economy was in a very bad shape until Hitler’s government took a complete control of the domestic economy. Why is a hyperinflation unable to increase economic growth by increasing individual marginal propensities to consume and invest?

I think that when there is a hyperinflation, people and companies face a significant constraint which is time. During a period of hyperinflation, if people and companies use the currency as exchange median (incomes), the marginal substitution of working (production) to consumption (closing down) becomes extremely significant that individuals become more willing to give away more of their working hours in order to travel to store and make consumption, it is also the same for companies that they are more willing to close down production to avoid increasing risk in the economy.

Overall, there is a hyperinflation, the constraint to time becomes more limited and the price of time becomes increasingly valuable that people even cannot afford spending for earning more incomes.