Portfolio Quality and Mutual Fund Performance

International Review of Finance, Vol. 14, Issue 4, pp. 485-521, 2014

51 Pages Posted: 25 Sep 2012 Last revised: 29 Jan 2015

See all articles by David R. Gallagher

David R. Gallagher

Rozetta Institute

Peter Gardner

Plato Investment Management

Camille Schmidt

SuperRatings

Terry S. Walter

University of Sydney; University of Technology, Sydney - School of Finance and Economics; Financial Research Network (FIRN)

Multiple version iconThere are 2 versions of this paper

Date Written: December 11, 2013

Abstract

This study investigates how the quality of stocks owned by mutual funds affects the performance of those funds during 2000-2009. The quality of a stock is positively related to its size, while quality is inversely related to volatility. Evidently, stocks in the lowest quality decile perform particularly poorly amidst volatile market conditions with a mean monthly DGTW alpha 1.93% (25.73% p.a.) less than high quality stocks. Furthermore, funds which hold the lowest quality stocks exhibit substantial underperformance, particularly during market downturns, with funds in the lowest decile of quality incurring a mean monthly DGTW alpha 0.96% (12.14% p.a.) lower than their higher quality counterparts. Interestingly, we discover a trend to funds investing in higher quality stocks over time.

Keywords: Mutual Funds, Active Management, Investment Performance, Fundamental Analysis, Quality, Stock Holdings

JEL Classification: G11, G23

Suggested Citation

Gallagher, David R. and Gardner, Peter and Schmidt, Camille and Walter, Terry Stirling, Portfolio Quality and Mutual Fund Performance (December 11, 2013). International Review of Finance, Vol. 14, Issue 4, pp. 485-521, 2014 , Available at SSRN: https://ssrn.com/abstract=2151658 or http://dx.doi.org/10.2139/ssrn.2151658

David R. Gallagher

Rozetta Institute ( email )

Sydney

Peter Gardner

Plato Investment Management ( email )

Level 14, 167 Macquarie St
Sydney, New South Wales 2066
Australia

Camille Schmidt (Contact Author)

SuperRatings

Australia

Terry Stirling Walter

University of Sydney ( email )

P.O. Box H58
Sydney, NSW 2006
Australia

University of Technology, Sydney - School of Finance and Economics ( email )

Haymarket
Sydney, NSW 2007
Australia
+61 2 9514 3860 (Phone)
+61 2 9514 7711 (Fax)

HOME PAGE: http://datasearch.uts.edu.au/business/finance/staff/StaffDetails.cfm?UnitStaffId=5373

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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