Mutual Fund Performance: Using Bespoke Benchmarks to Disentangle Mandates, Constraints and Skill

47 Pages Posted: 31 Jul 2018 Last revised: 9 Feb 2019

See all articles by Alessandro Beber

Alessandro Beber

Cass Business School; Centre for Economic Policy Research (CEPR)

Michael W. Brandt

Duke University - Fuqua School of Business; National Bureau of Economic Research (NBER)

Jason Cen

University of Exeter Business School

Kenneth A. Kavajecz

Edgewood College; Phoenix Rising Advisory

Multiple version iconThere are 2 versions of this paper

Date Written: February 7, 2019

Abstract

While no two mutual funds are alike in terms of their mandates and constraints, metrics used to evaluate fund performance relative to peers typically fail to account for these differences by relying on generic benchmark indices and rankings. We develop a methodology to construct a conditional multi-factor benchmark that explicitly incorporates the details of a given fund’s mandates and constraints. The results suggest that (i) mandates and constraints are economically important and affect funds differently, (ii) in general, the average mutual fund has a much improved track record when comparing themselves to a bespoke benchmark, and (iii) the rank ordering of fund bespoke performance relative peers is significantly different than the original rank ordering suggesting investors and regulators would make better decisions regarding their mutual funds if they incorporate the impact of mandates and constraints.

Keywords: mutual funds, performance evaluation, benchmarks, constraints, active manager skill

JEL Classification: G12, G23

Suggested Citation

Beber, Alessandro and Brandt, Michael W. and Cen, Jason and Kavajecz, Kenneth A., Mutual Fund Performance: Using Bespoke Benchmarks to Disentangle Mandates, Constraints and Skill (February 7, 2019). Available at SSRN: https://ssrn.com/abstract=3211588 or http://dx.doi.org/10.2139/ssrn.3211588

Alessandro Beber

Cass Business School ( email )

London, EC2Y 8HB
Great Britain

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Michael W. Brandt (Contact Author)

Duke University - Fuqua School of Business ( email )

1 Towerview Drive
Durham, NC 27708-0120
United States

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

Jason Cen

University of Exeter Business School ( email )

Streatham Court
Xfi Building, Rennes Dr.
Exeter, EX4 4JH
United Kingdom

Kenneth A. Kavajecz

Edgewood College ( email )

1000 Edgewood College Dr.
Madison, WI 53711
United States
6087704677 (Phone)

Phoenix Rising Advisory ( email )

519 NORTH PINCKNEY STREET
MADISON, WI 53703
United States
6087704677 (Phone)

HOME PAGE: http://www.pr-advisory.com

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