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

Abstract

We examine the selection of fund self-declared benchmarks. While the incidence of style mismatched benchmarks is high at the beginning of our sample (41% of fund assets/34% of funds), it declines significantly over time. This decline is driven primarily by existing funds changing their self-declared benchmarks to correctly match their style. In examining why funds ‘correct’ their benchmarks over time, we find that investor learning, institutional investor governance, product market competition and fund company risk management all play a role. Lastly, we find that funds overseen by entrenched managers are more likely to use a mismatched benchmark.

Keywords: Mutual Fund, Benchmarks, Benchmarking, Performance Evaluation

JEL Classification: G1, G11, G2, G23