Benchmark Discrepancies and Mutual Fund Performance Evaluation
61 Pages Posted: 17 May 2018 Last revised: 17 Sep 2020
Date Written: September 2020
We introduce a new holdings-based procedure to identify whether a mutual fund has a benchmark discrepancy, which we define as a benchmark other than the prospectus benchmark best matching a fund’s investment strategy. We find that funds with a benchmark discrepancy tend to be riskier than their prospectus benchmarks indicate. As a result, the funds on average outperform their prospectus benchmarks—before further risk-adjusting—despite underperforming the benchmarks that best match their portfolios.
Keywords: mutual funds, benchmarks, holdings, performance, active share
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