Conditional Benchmarks and Predictors of Mutual Fund Performance

46 Pages Posted: 18 Feb 2016 Last revised: 4 Mar 2018

See all articles by Scott Cederburg

Scott Cederburg

University of Arizona - Department of Finance

Michael S. O'Doherty

University of Missouri at Columbia - Department of Finance

N. Eugene Savin

University of Iowa - Henry B. Tippie College of Business - Department of Economics

Ashish Tiwari

University of Iowa

Date Written: March 1, 2018

Abstract

Recent studies link mutual fund performance to measures of active management, and this evidence often takes the form of large spreads in unconditional alphas for characteristic-sorted portfolios. Unconditional benchmarks can, however, produce misleading inferences on managerial skill for strategies that exhibit substantial turnover and unstable factor exposures. We propose a performance attribution model that accounts for predictable changes in portfolio style. Compared to existing methods, our benchmarks yield superior tracking performance and a more powerful statistical assessment of abnormal returns. We reevaluate six active management proxies using our method and conclude that these measures are largely unrelated to managerial ability.

Keywords: Mutual funds, performance evaluation, conditional performance evaluation

JEL Classification: G11, G23

Suggested Citation

Cederburg, Scott and O'Doherty, Michael S. and Savin, Nathan Eugene and Tiwari, Ashish, Conditional Benchmarks and Predictors of Mutual Fund Performance (March 1, 2018). Available at SSRN: https://ssrn.com/abstract=2733254 or http://dx.doi.org/10.2139/ssrn.2733254

Scott Cederburg

University of Arizona - Department of Finance ( email )

McClelland Hall
P.O. Box 210108
Tucson, AZ 85721-0108
United States

Michael S. O'Doherty (Contact Author)

University of Missouri at Columbia - Department of Finance ( email )

Robert J. Trulaske, Sr. College of Business
401 Cornell Hall
Columbia, MO 65211
United States

Nathan Eugene Savin

University of Iowa - Henry B. Tippie College of Business - Department of Economics ( email )

108 Pappajohn Building
Iowa City, IA 52242
United States
319-335-0855 (Phone)

Ashish Tiwari

University of Iowa ( email )

Finance Department
Henry B. Tippie College of Business, 108 PBB
Iowa City, IA 52242
United States
(319) 353-2185 (Phone)
(319) 335-3690 (Fax)

HOME PAGE: http://www.biz.uiowa.edu/faculty/atiwari

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