Searching For Mutual Fund Winners? The Strategy Is To Outbid Both, The Benchmark and The Peer Group

30 Pages Posted: 10 Jan 2023

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: January 8, 2023

Abstract

Standard Fama-French-Carhart models define ‘winners’ as funds that generate the 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 propose a two-stage procedure that allows investors to select “true” winners(losers) which generate the highest factor-risk-adjusted performance relative to the benchmark and the peer group simultaneously. Utilizing 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 significant 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, Searching For Mutual Fund Winners? The Strategy Is To Outbid Both, The Benchmark and The Peer Group (January 8, 2023). Available at SSRN: https://ssrn.com/abstract=4320200 or http://dx.doi.org/10.2139/ssrn.4320200

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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