Human capital efficiency and equity funds’ performance during the COVID-19 pandemic

Accepted/In Press date: 18 September 2020

e-pub ahead of print date: 25 September 2020

Published date: January 2021

Additional Information: Funding Information: The paper investigates the impact of human capital efficiency (HCE) on equity funds? performance during three stages of the COVID-19 pandemic. We collected data for 799 open-ended equity funds across five EU countries and ranked them in five categories of HCE and compare their risk-adjusted performance across these categories. The results suggest that during the COVID-19 outbreak, the equity funds that were ranked higher in HCE outperformed their counterparts. We suggest that fund managers should invest in human capital to improve funds? coping ability and resilience during periods of extreme stress.The economic effects originated by the COVID-19 pandemic has been explored across stock markets, commodities, and cryptocurrencies (Akhtaruzzaman et al., 2020; Corbet et al., 2020). The comprehensive overview of the COVID-19 contagion and unique characteristics of this new crisis is provided by (Yarovaya et al., 2020), while Goodell (2020) further highlights the direction for future COVID-19 research. Owing to the active investment strategies, mutual funds usually act as panic healers and fund managers are expected to produce consistent positive alphas (Huang et al., 2019). Rizvi, Mirza, Naqvi, & Rahat, 2020 reported varying mutual funds? performance during the COVID-19 outbreak in EU. They also pointed out the drift in investment styles of fund managers as a response to the evolving situation. While new evidence on the economic effects of the COVID-19 rapidly become available, to our best knowledge, this paper is the first attempt to analyze the impact of investment in human capital on the coping mechanism of the mutual funds and their resilience to the COVID-19 crisis. The investment in human capital is very strategic (Hitt, Bierman, Shimizu, & Kochhar, 2001) and contributes to value creation (Lopez-Cabrales, Valle, & Herrero, 2006). The relevance of human resources increases manifold for services (Nieves & Quintana, 2018), and mutual funds represent an essential cluster of financial services that have significant dependence on human capital. Therefore, it is crucial to assess if mutual funds? performance varies with human capital efficiency.Thus, in this paper, we analyze the linkages between human capital efficiency and the mutual fund performance in five European economies that have been severely affected by the COVID-19 pandemic. This includes Spain, Italy, France, Germany, and Belgium, which account for 14.8% of the global cases and 28.4% of the mortality count (see Table 1 for COVID-19 statistics in these countries). Most of the early studies on the COVID-19 are focused on the US economy and impact on the US market (e.g., Goodell & Huynh, 2020; Sharif et al., 2020). In this paper, we consider the impact of investing in human capital on a sample of EU funds and assess their resilience towards the pandemic, providing novel and original contribution to the COVID-19 literature.The results show that funds with higher human capital efficiency depicted better risk-adjusted performance and Jensen's alpha compared to their counterparts during the outbreak. This remains consistent across different stages of the COVID-19 crisis in five countries analyzed. We report that even when the pandemic reached its peak in the EU and the majority of funds demonstrated negative returns, the funds that are in the top 20% of human capital efficiency demonstrated positive (and higher) risk-adjusted returns. The findings remained robust for various performance measures as well as for abnormal returns assessment during pre-COVID and outbreak periods.This paper utilizes data for 799 open-ended equity funds across five countries, Spain, Italy, France, Germany, and Belgium, from the 1st of January to the June 2, 2020. The focus of this paper is to evaluate the impact of human capital efficiency on the performance of equity funds during the COVID-19 pandemics. Pulic (2000), Pulic & Kolakovic, 2003 suggest that Human Capital Efficiency (HCE) is a function of value-added (VA) and human capital (HC) that can be expressed as:We estimate HCE for each fund as of 4Q19. The necessary information related to compensation and AUM is available from financial disclosures of each fund, and we only include funds that publicly disseminates these details. The compensation consists of payroll, commissions, bonuses, allowances, training expenditures, etc. that signify various spending on human resources in a given fund. Our final sample consists of 799 equity funds across five countries. To calculate the CAPM based alpha, we use daily net asset value (NAV) going back to January 2019 (pre COVID-19 period). The individual fund alpha, along with AUM, is used to estimate VA in equation (1). The value-added and investment in human capital will get us HCE. Once HCE for each fund is estimated, we classify them in five groups (20% each) from high to low HCE. The comparative performance is assessed across these groups during the COVID-19 outbreak. We expect that funds with higher HCE should outperform their counterparts with lower HCE. Table 2 presents the country-wise distribution of these funds across five rank groups.The performance of mutual funds is dependent on the investment strategies employed by the portfolio managers. These managers represent the human capital of a fund, and investment in this resource contributes towards human capital efficiency. Consequently, this efficiency should translate into a performance that should vary according to the level of human capital efficiency. The COVID-19 is an unfortunate but unique opportunity to evaluate the impact of human capital efficiency (HCE) on funds? performance during a period of extreme stress. We analyze this by sorting equity funds based on their HCE and ranking them in five categories from high to low. The comparative performance is assessed across these categories. Our results suggest that during the COVID-19 outbreak, the equity funds that were ranked higher in human capital efficiency outperformed their counterparts. The analysis for different stages of the outbreak revealed some interesting findings. As the contagion peaks in the EU, most funds showed negative returns and Jensen's alpha. However, even during this stage, the funds with higher HCE continued to demonstrate resilience with significant positive risk-adjusted returns as well as Jensen's alpha. Our analysis of abnormal returns confirms the importance of HCE as funds in higher HCE category demonstrated superior abnormal returns for pre COVID-19 period as well as during the outbreak. We conclude that mutual funds should concentrate on investing in human capital as resulting efficiency leads to robust performance during periods marked with uncertainties and turmoil. Publisher Copyright: © 2020 Elsevier Inc.

Keywords: COVID-19, Human Capital Efficiency, risk-adjusted performance

Local EPrints ID: 444848

URI: http://eprints.soton.ac.uk/id/eprint/444848

DOI: doi:10.1016/j.iref.2020.09.017

ISSN: 1059-0560

PURE UUID: e2a503d2-235a-4bd9-a890-d499aa673dd4

ORCID for Larisa Yarovaya: orcid.org/0000-0002-9638-2917

Date deposited: 06 Nov 2020 17:32

Last modified: 17 Mar 2024 06:00