The Value of Mutual Fund Rankings to the Individual Investor

37 Pages Posted: 29 Jul 1999  

Miranda Lam

Bertolon School of Business

Date Written: July 1999

Abstract

This paper investigates whether an investment strategy based on mutual fund rankings by the popular press can earn abnormal returns. In an efficient market, mutual fund managers cannot beat the market and any superior performance is simply luck and does not persist. The sample contains 757 funds that have received rankings from Barron's, Business Week, and Forbes between 1993-1995. Using published rankings as the sample selection criterion has several advantages. First, these funds do not suffer from survivorship bias. Second, the sample was chosen without analyzing prior period data. Therefore, the evaluation period and methodology are independent of the selection period and methodology. Third, the funds examined in this paper are chosen from all funds available as of the publication dates. Therefore, the rankings represent an investment strategy that can be easily implemented by investors. Lastly, the three publications used in this study have a large readership and many investors will be interested in the findings. This study shows that an investment strategy based on popular mutual fund rankings did not produce superior performance. The ranked funds have higher excess returns relative to peer funds during the pre-ranking period, but have similar excess returns as their peers in the post-ranking period. These results do not support the short-term persistent performance hypothesis. The ranked funds also have higher risk, measured by standard deviations, in both the pre- and post-ranking periods. The majority of the ranked funds (54%) have negative risk-adjusted performance in the post-ranking period against a 4-factor benchmark and 65% of the funds have lower performance compared to the pre-ranking period. The results are not consistent with persistent risk-adjusted performance.

JEL Classification: G14

Suggested Citation

Lam, Miranda, The Value of Mutual Fund Rankings to the Individual Investor (July 1999). Available at SSRN: https://ssrn.com/abstract=170851 or http://dx.doi.org/10.2139/ssrn.170851

Miranda Lam (Contact Author)

Bertolon School of Business ( email )

Salem State University
Salem, MA 01970-5353
United States

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