Portfolio Quality and Mutual Fund Performance

37 Pages Posted: 3 Dec 2014

See all articles by David R. Gallagher

David R. Gallagher

Rozetta Institute

Peter Gardner

Plato Investment Management

Camille Schmidt


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 2014


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 Daniel, Grinblatt, Titman and Wermers (DGTW) alpha 1.93% [25.73% per annum (pa)] 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% pa) lower than their higher quality counterparts. Interestingly, we discover a trend to funds investing in higher quality stocks over time.

Suggested Citation

Gallagher, David R. and Gardner, Peter and Schmidt, Camille and Walter, Terry Stirling, Portfolio Quality and Mutual Fund Performance (December 2014). International Review of Finance, Vol. 14, Issue 4, pp. 485-521, 2014, Available at SSRN: https://ssrn.com/abstract=2533271 or http://dx.doi.org/10.1111/irfi.12031

David R. Gallagher (Contact Author)

Rozetta Institute ( email )


Peter Gardner

Plato Investment Management ( email )

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

Camille Schmidt



Terry Stirling Walter

University of Sydney ( email )

P.O. Box H58
Sydney, NSW 2006

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

Sydney, NSW 2007
+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

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

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