TY - JOUR
T1 - Searching for mutual fund winners? the strategy is to outbid both, the benchmark and the peer group
AU - Mateus, Cesario
AU - Mateus, Irina
AU - Todorovic, Natasa
N1 - Publisher Copyright:
© 2023 Informa UK Limited, trading as Taylor & Francis Group.
PY - 2024
Y1 - 2024
N2 - 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.
AB - 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.
KW - benchmark-adjusted alphas
KW - peer-group-adjusted alphas
KW - performance ranking
KW - US equity mutual funds
UR - http://www.scopus.com/inward/record.url?scp=85149312275&partnerID=8YFLogxK
U2 - 10.1080/00036846.2023.2175778
DO - 10.1080/00036846.2023.2175778
M3 - Journal article
AN - SCOPUS:85149312275
SN - 0003-6846
VL - 56
SP - 1268
EP - 1282
JO - Applied Economics
JF - Applied Economics
IS - 11
ER -