Benchmarking UK Mutual Fund Performance: The Random Portfolio Experiment

21 Pages Posted: 21 Apr 2015

See all articles by Andrew Clare

Andrew Clare

City University London - Sir John Cass Business School

Niall O'Sullivan

University College Cork

Meadhbh Sherman

University College Cork

Date Written: April 17, 2015

Abstract

We formally test the age-old question of whether professionally managed equity funds outperform portfolios of stocks selected at random, also known as ‘dartboard’ or ‘monkey’ portfolios. We examine the case of UK equity mutual funds between 1980 and 2011. We employ alpha and the t-statistic of alpha as performance measures from CAPM, Fama-French and Carhart factor models. We find that around 5% to 25% of funds across alternative performance measures and models yield abnormal returns beyond that which can be explained by random chance or luck in performance. The t-statistic of alpha indicates a slightly higher percentage of skilful funds compared to alpha, most likely for statistical reasons around short-lived funds. The degree of skilful performance among managed funds is higher when evaluated by a single factor CAPM or Fama and French three factor alpha but a Carhart four factor model explains much of this performance.

Keywords: mutual fund performance, random portfolios, skill, luck

JEL Classification: G14, G17, C15

Suggested Citation

Clare, Andrew D. and O'Sullivan, Niall and Sherman, Meadhbh, Benchmarking UK Mutual Fund Performance: The Random Portfolio Experiment (April 17, 2015). Available at SSRN: https://ssrn.com/abstract=2595575

Andrew D. Clare

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

Niall O'Sullivan (Contact Author)

University College Cork ( email )

Department of Economics
University College Cork
Cork, n/a
Ireland

Meadhbh Sherman

University College Cork ( email )

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