Download this Paper Open PDF in Browser

The Performance of Mutual Funds in the Period 1945-1964

37 Pages Posted: 31 Aug 2002  

Michael C. Jensen

SSRN; Harvard Business School; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI); Harvard University - Accounting & Control Unit

Date Written: May 1, 1967

Abstract

In this paper I derive a risk-adjusted measure of portfolio performance (now known as Jensen's Alpha) that estimates how much a manager's forecasting ability contributes to the fund's returns. The measure is based on the theory of the pricing of capital assets by Sharpe (1964), Lintner (1965a) and Treynor (Undated). I apply the measure to estimate the predictive ability of 115 mutual fund managers in the period 1945-1964 - that is their ability to earn returns which are higher than those we would expect given the level of risk of each of the portfolios. The foundations of the model and the properties of the performance measure suggested here are discussed in Section II.

The evidence on mutual fund performance indicates not only that these 115 mutual funds were on average not able to predict security prices well enough to outperform a buy-the-market-and-hold policy, but also that there is very little evidence that any individual fund was able to do significantly better than that which we expected from mere random chance. It is also important to note that these conclusions hold even when we measure the fund returns gross of management expenses (that is assume their bookkeeping, research, and other expenses except brokerage commissions were obtained free). Thus on average the funds apparently were not quite successful enough in their trading activities to recoup even their brokerage expenses.

Keywords: Jensen's Alpha, mutual fund performance, risk-adjusted returns, forecasting ability, predictive ability

Suggested Citation

Jensen, Michael C., The Performance of Mutual Funds in the Period 1945-1964 (May 1, 1967). Journal of Finance, Vol. 23, No. 2, pp. 389-416, 1967. Available at SSRN: https://ssrn.com/abstract=244153 or http://dx.doi.org/10.2139/ssrn.244153

Michael C. Jensen (Contact Author)

SSRN ( email )

7858 Sanderling Road
Sarasota, FL 34242
United States
617-510-3363 (Phone)
305 675-3166 (Fax)

HOME PAGE: http://ssrn.com/author=9

Harvard Business School ( email )

Soldiers Field
Negotiations, Organizations & Markets
Boston, MA 02163
United States
617-510-3363 (Phone)
305-675-3166 (Fax)

HOME PAGE: http://drfd.hbs.edu/fit/public/facultyInfo.do?facInfo=ovr&facId=6484

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Harvard University - Accounting & Control Unit ( email )

Soldiers Field
Boston, MA 02163
United States

Paper statistics

Downloads
10,341
Rank
294
Abstract Views
41,971