Benchmark Discrepancies and Mutual Fund Performance Evaluation
70 Pages Posted: 17 May 2018 Last revised: 25 Sep 2018
Date Written: September 22, 2018
We introduce a new holdings-based procedure to identify the benchmark discrepancies of mutual funds, which we define as a benchmark other than the prospectus benchmark best matching a fund’s investment strategy. Funds with a benchmark discrepancy tend to be riskier than their prospectus benchmarks indicate. As a result, those funds on average outperform their prospectus benchmark—before risk-adjusting—despite generally underperforming the benchmark that best matches their holdings. High active share funds outperform more if there is no benchmark discrepancy, suggesting that managers with more skill are less likely to have a benchmark discrepancy.
Keywords: mutual funds, benchmarks, holdings, performance, active share
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