Performance Evaluation and Self-Designated Benchmark Indexes in the Mutual Fund Industry

37 Pages Posted: 14 Mar 2006 Last revised: 3 Feb 2008

See all articles by Berk A. Sensoy

Berk A. Sensoy

Vanderbilt University - Finance

Date Written: January 31, 2008

Abstract

Almost one-third of actively managed, diversified U.S. equity mutual funds specify a size and value/growth benchmark index in the fund prospectus that does not match the fund's actual style. Nevertheless, these "mismatched" benchmarks matter to fund investors. Performance relative to the specified benchmark is a significant determinant of a fund's subsequent cash inflows, even controlling for performance measures that better capture the fund's style. These incremental flows appear unlikely to be rational responses to abnormal returns. The evidence is consistent with the notion that mismatched self-designated benchmarks result from strategic fund behavior driven by the incentive to improve flows.

Keywords: Mutual Funds, Performance Evaluation, Flows, Incentives, Benchmarks

Suggested Citation

Sensoy, Berk A., Performance Evaluation and Self-Designated Benchmark Indexes in the Mutual Fund Industry (January 31, 2008). Available at SSRN: https://ssrn.com/abstract=890692 or http://dx.doi.org/10.2139/ssrn.890692

Berk A. Sensoy (Contact Author)

Vanderbilt University - Finance ( email )

401 21st Avenue South
Nashville, TN 37203
United States

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