Self-Declared Benchmarks and Fund Manager Intent: 'Cheating' or Competing?

Abstract

Using a panel of self-declared benchmarks, we examine funds’ use of mismatched benchmarks over time. Mismatching is high at the beginning of our sample (45% of TNA in 2008), consistent with prior studies, but declines significantly over time (27% in 2020), driven by existing specialized funds changing benchmarks to match their style. Market forces including investor learning, institutional investor governance, market competition, and product positioning all play a role in the benchmark correction decisions. For broad funds, mismatched benchmarks are not associated with a performance bias. Our study highlights the value of market solutions in aligning manager-investor interests.

Keywords: Mutual Fund, Benchmarks, Benchmarking, Performance Evaluation

JEL Classification: G1, G11, G2, G23