Revisiting mutual fund performance evaluation

Abstract

Mutual fund manager excess performance should be measured relative to their self-reported benchmark rather than the return of a passive portfolio with the same risk characteristics. Ignoring the self-reported benchmark introduces biases in the measurement of stock selection and timing components of excess performance. We revisit baseline empirical evidence in mutual fund performance evaluation utilizing stock selection and timing measures that address these biases. We introduce a new factor exposure based approach for measuring the -static and dynamic -timing capabilities of mutual fund managers. We overall conclude that current studies are likely to be overstating lack of skill because they ignore the managers' self-reported benchmark in the performance evaluation process. Revisiting Mutual Fund Performance Evaluation AbstractMutual fund manager excess performance should be measured relative to their self-reported benchmark rather than the return of a passive portfolio with the same risk characteristics. Ignoring the self-reported benchmark introduces biases in the measurement of stock selection and timing components of excess performance. We revisit baseline empirical evidence in mutual fund performance evaluation utilizing stock selection and timing measures that address these biases. We introduce a new factor exposure based approach for measuring the -static and dynamic -timing capabilities of mutual fund managers. We overall conclude that current studies are likely to be overstating lack of skill because they ignore the managers' self-reported benchmark in the performance evaluation process.

What impact does a change of fund manager have on mutual fund performance?

“…However, we concur with the views of Cremers et al (2012), Argon and Ferson (2006) or Angelidis et al (2013), who all argue that it is more informative and useful for investors and researchers if the performance of mutual fund managers is measured against a passive benchmark which is closely aligned to a fund's objectives and its risk return parameters. A dedicated passive benchmark should provide a more accurate and more appropriate estimate of a manager's value-added skill.…”

Gender, style diversity, and their effect on fund performance

“…There is an ongoing debate in the literature on whether mutual fund managers should be evaluated against the benchmark reported in their prospectus or with respect to a broad market-based passive portfolio of comparable risk (see, inter alia, Cremers and Petajisto, 2009;Sensoy, 2009;Hsu et al, 2010;Cremers et al, 2010;Angelidis et al, 2013). Babalos et al (2013) employing an augmented Carhart's multi-benchmark model (1997) with a stock-level liquidity factor documented the absence of skills among Greek domestic equity fund managers.…”

Realism, Skill & Incentives: Current and Future Trends in Investment Management and Investment Performance

“…11 Angelidis et al (2013) share some findings with Elton et al (2012) but have arrived at them from a returns-based perspective rather than an asset holding-based perspective. Angelidis et al (2013) conclude that it is appropriate to use managers' designated benchmarks rather than the traditional factor models to evaluate investment performance as fund behaviour is determined by the prospectus benchmark which they are in practice evaluated against.…”

“…Angelidis et al (2013) conclude that it is appropriate to use managers' designated benchmarks rather than the traditional factor models to evaluate investment performance as fund behaviour is determined by the prospectus benchmark which they are in practice evaluated against. The use of inappropriate benchmarks is policed in practice by investment consultants and organisations such as Morningstar and Lipper whose business is to disseminate information on investment funds to their clients.…”