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
Date Written: December 11, 2013
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: Suggested Citation