Benchmark Discrepancies and Mutual Fund Performance Evaluation
77 Pages Posted: 17 May 2018 Last revised: 30 Jul 2019
Date Written: July 29, 2019
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. 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. High active share funds outperform to a greater degree if there is no benchmark discrepancy, suggesting that active managers with more skill are less likely to have a benchmark discrepancy.
Keywords: mutual funds, benchmarks, holdings, performance, active share
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