Benchmark-adjusted performance of US equity mutual funds and the issue of prospectus benchmarks

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7 Citations (Scopus)

Abstract

This study examines the impact of mismatch between prospectus benchmark and fund objectives on benchmark-adjusted fund performance and ranking in a sample of 1281 US equity mutual funds. All funds in our sample report S&P500 index as a prospectus benchmark, yet 2/3 of those are placed in the Morningstar category with risk and objectives different to those of the S&P500 index. We identify more appropriate ‘category benchmarks’ for those mismatched funds and obtain their benchmark-adjusted alphas using recent Angelidis et al. (J Bank Finance 37(5):1759–1776, 2013) methodology. We find that S&P500-adjusted alphas are higher than ‘category benchmark’-adjusted alphas in 61.2% of the cases. In terms of fund quartile rankings, 30% of winner funds lose that status when the prospectus benchmark is substituted with the one better matching their objectives. In the remaining performance quartiles, there is no clear advantage of using S&P 500 as a benchmark. Hence, the prospectus benchmark can mislead investors about fund’s relative performance and ranking, so any reference to performance in a fund’s prospectus should be treated with caution.

Original languageEnglish
JournalJournal of Asset Management
Volume20
Issue number1
Pages (from-to)15-30
Number of pages16
ISSN1470-8272
DOIs
Publication statusPublished - 4 Feb 2019
Externally publishedYes

Keywords

  • Benchmark-adjusted alphas
  • Mutual fund benchmark mismatch
  • Performance ranking
  • Prospectus benchmark selection

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