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In this study we re-visit the performance of 887 active UK equity mutual funds using a new approach proposed by Angelidis, Giamouridis and Tessaromatis (2013). The authors argue that mutual funds stock selection is driven by the benchmark index, so if the benchmark generates alpha, there will be a bias in interpretation of manager's stock picking ability. In their model, alpha of a fund is adjusted by benchmark's alpha. By applying this method, we eliminate bias inflicted by the persistently negative alphas of FTSE 100 index in the period 1992-2013. We find that adjusted Fama-French and Carhat alphas of UK equity mutual funds are higher than those implied by the standard three and four factor models and overall positive, contrary to most of the existing literature on UK fund performance. This result is consistent across funds' investment styles and robust to use of FTSE Small Cap as benchmark for a subsample of small cap funds.

In this paper we provide critical review of recent developments in the mutual fund performance evaluation literature. The new literature centres around two main themes: enhancing explanatory power of the standard Fama-French-Carhart factor models by augmenting them with different factors and altering standard models to account for presence of non-zero alphas in passive indices used as fund benchmarks.The latter includes the literature providing solutions for scenarios in which those benchmarks do not match fund objectives. We find that in the plethora of suggested 'missing' factors, not one can be universally used to explain all anomalies or price all stocks. We also find that new models that adjust a fund's standard Carhart alpha for alpha of its benchmark or for commonalities in its peer-group, provide additional information on fund performance to that given by the standard models. Specifically, these models give account of fund's relative performance -to the benchmark or the peer-group, which is of use to investors.

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