Mutual fund performance: Shouldn’t clear winners outperform both, the benchmark and the peer-group?

33 Pages Posted: 8 Jul 2021

See all articles by Cesario Mateus

Cesario Mateus

Aalborg University Business School

Irina B. Mateus

Aalborg University

Natasa Todorovic

City University London - The Business School

Date Written: July 3, 2021

Abstract

Standard Fama-French-Carhart models define ‘winners’ as those funds that generate highest excess returns given the factor risks involved; however they do not provide information on whether such winners are outperforming their prospectus benchmark or their peer-group. In addition, existing literature relying on these models by and large does not find evidence of persistence in performance. In this paper, we argue that true (unbiased) winners should be defined differently: they are funds placed in the top-ranking group (quartile, quintile, etc.), which generate the highest factor-risk-adjusted performance relative to the benchmark and the peer-group simultaneously. We prove in this paper that using this definition and selecting true winner funds based on benchmark- and peer-group-adjusted alphas jointly lead to better performance than selecting the funds using either of these two alphas separately. Utilising both adjustments at the same time results in a strong predictive ability, leading to a selection of funds that persist in performance: our true winner funds have statistically significantly superior benchmark-adjusted alphas, peer-group adjusted alphas and Sharpe ratios one-year-ahead, which are significantly different from those generated by the true loser funds. The results are robust to extended investment horizon, and alpha estimation method, and they are not driven by outliers, size of fund-sorts, or any particular period within our sample.

Keywords: US Equity Mutual Funds, Benchmark-adjusted alphas, Peer-group-adjusted alphas, Performance ranking

JEL Classification: G11, G12, G2

Suggested Citation

Mateus, Cesario and B. Mateus, Irina and Todorovic, Natasa, Mutual fund performance: Shouldn’t clear winners outperform both, the benchmark and the peer-group? (July 3, 2021). Available at SSRN: https://ssrn.com/abstract=3879461 or http://dx.doi.org/10.2139/ssrn.3879461

Cesario Mateus (Contact Author)

Aalborg University Business School ( email )

Aalborg
Denmark

Irina B. Mateus

Aalborg University ( email )

Fredrik Bajers Vej 7E
Aalborg, DK-9220
Denmark

Natasa Todorovic

City University London - The Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

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