The Impact of Benchmark Choice on US Mutual Fund Benchmark-Adjusted Performance and Ranking

30 Pages Posted: 7 Aug 2017

See all articles by Irina B. Mateus

Irina B. Mateus

Aalborg University

Cesario Mateus

Aalborg University Business School

Natasa Todorovic

City University London - The Business School

Date Written: August 5, 2017

Abstract

This study re-visits the question of benchmark mismatch among 1281 US equity mutual funds and its impact on benchmark-adjusted fund performance and ranking. All funds report S&P500 index as a prospectus benchmark, yet 2/3 of those are placed in the Morningstar category with risk and objectives different to those of the S&P500 index. We identify ‘true’ benchmarks for those mismatched funds and find that their S&P adjusted alphas are higher than ‘true’ benchmark adjusted alphas in 61.2% of the cases. In terms of fund quartile rankings, 30% of winner funds lose that status when the prospectus benchmark is substituted with a more suited one. In the remaining performance quartiles there is no clear advantage of using S&P 500 as a prospectus benchmark. The prospectus benchmark therefore can mislead investors about fund’s relative performance. This leads us to conclude that any reference to performance in a fund’s prospectus should be treated with caution.

Keywords: Prospectus benchmark selection, Mutual fund benchmark mismatch, Benchmark-adjusted alphas, Performance ranking

JEL Classification: G11, G12, G23

Suggested Citation

B. Mateus, Irina and Mateus, Cesario and Todorovic, Natasa, The Impact of Benchmark Choice on US Mutual Fund Benchmark-Adjusted Performance and Ranking (August 5, 2017). Available at SSRN: https://ssrn.com/abstract=3014010 or http://dx.doi.org/10.2139/ssrn.3014010

Irina B. Mateus

Aalborg University ( email )

Fredrik Bajers Vej 7E
Aalborg, DK-9220
Denmark

Cesario Mateus

Aalborg University Business School ( email )

Aalborg
Denmark

Natasa Todorovic (Contact Author)

City University London - The Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

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