Mutual Fund Performance: Using Bespoke Benchmarks to Disentangle Mandates, Constraints and Skill
47 Pages Posted: 31 Jul 2018 Last revised: 9 Feb 2019
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Mutual Fund Performance: Using Bespoke Benchmarks to Disentangle Mandates, Constraints and Skill
Mutual Fund Performance: Using Bespoke Benchmarks to Disentangle Mandates, Constraints and Skill
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: Suggested Citation