Mutual Fund Holders Unanimity and Market Timing Performance

Abstract

The paper derives a measure for evaluation of performance of mutual funds in an environment where mutual fund managers are using conditioning information, returns are conditionally normally distributed, and investors have exponential utility functions. The ranking obtained is consistent with the choice of investors who i) wish to invest in only one risky fund and in the risk free asset, and ii) are not using conditioning information, used by the fund's manager, when optimally mixing their risky fund with the risk free asset. The ranking obtained is the same as the one obtained by the Sharpe measure in the case where fund managers are not using conditioning information, and it is different otherwise. A by-product of the analysis is the "positive period weighting measure" proposed by Grinblatt and Titman (1989) as an alternative to the Jensen measure in an environment where portfolio managers are using conditioning information.

JEL Classification: G12, G14