Conditional Benchmarks and Predictors of Mutual Fund Performance
46 Pages Posted: 18 Feb 2016 Last revised: 4 Mar 2018
Date Written: March 1, 2018
Recent studies link mutual fund performance to measures of active management, and this evidence often takes the form of large spreads in unconditional alphas for characteristic-sorted portfolios. Unconditional benchmarks can, however, produce misleading inferences on managerial skill for strategies that exhibit substantial turnover and unstable factor exposures. We propose a performance attribution model that accounts for predictable changes in portfolio style. Compared to existing methods, our benchmarks yield superior tracking performance and a more powerful statistical assessment of abnormal returns. We reevaluate six active management proxies using our method and conclude that these measures are largely unrelated to managerial ability.
Keywords: Mutual funds, performance evaluation, conditional performance evaluation
JEL Classification: G11, G23
Suggested Citation: Suggested Citation