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

Mateus, Irina B.; Mateus, Cesário; Todorović, Nataša

doi:10.1057/s41260-018-0101-z

Cited by 12 publications

(7 citation statements)

References 27 publications

(42 reference statements)

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“…If all the funds in our sample followed the same investment style as the S&P500, they would all be placed in the Large Cap (in terms of size) -Blend (in terms of value/growth style) category in the Morningstar databasenonetheless, our results show they are not. This is in line with a number of papers (see Sensoy, 2009, for earlier andTodorovic, 2019b for most recent evidence) which document that funds do not necessarily follow the style of their primary benchmarks.…”

Section: Datasupporting

confidence: 82%

Does equity mutual fund factor-risk-shifting pay off? Evidence from the US

Mateus

Sarwar

Todorović

2022

The European Journal of Finance

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In this paper, we assess the relationship between risk-shifting of mutual funds, measured as benchmark-adjusted factor-based investment style change following a structural break, and their risk-adjusted performance. We isolate only the breaks in style risk beyond those embedded in the funds' benchmark index to eliminate any natural style risk changes resulting from varying company fundamentals over time. We group style risk changes into extreme (style rotation), moderate (style drifting), and weak (style-strengthening/weakening) and assess which investment style category is most profitable to shift in to and out of. Our findings show that funds that exhibit breaks generate overall better risk-adjusted performance than those that do not. Funds that are most successful in risk-shifting have both statistically and economically distinct risk-adjusted performance, make shifts towards small/large/value/growth style combinations rather than mid-cap and blend style, exhibit breaks less frequently and has more moderate risk-shifts than funds that are unsuccessful.

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Section: Datasupporting

confidence: 82%

Does equity mutual fund factor-risk-shifting pay off? Evidence from the US

Mateus

Sarwar

Todorović

2022

The European Journal of Finance

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“…Secondly, as revealed by Sensoy (2009), many funds do not choose as their prospectus benchmark the passive index that best fits their investment strategy. The same was confirmed by Mateus, Mateus, and Todorovic (2019). In our sample, a large number of funds report the FTSE All Share index as their primary prospectus benchmark, including the funds within the small-cap Morningstar equity style, which highlights the problem of benchmark-style mismatch.…”

Section: 2active Peer Group Benchmarking Methodologysupporting

confidence: 74%

“…Firstly, a fund can strategically mislead investors by choosing a prospectus benchmark that does not match its risk profile and objectives but is easier to beat. Evidence of such practices in the US market can be found in Sensoy (2009), Kacperczyk, Sialm, and Zheng (2008), and Mateus, Mateus, and Todorovic (2019). Secondly, even if a UK mutual fund follows a well-known investment style, corresponding cross-style-specific indices (such as large-cap-growth or small-cap-value) for the UK are not available.…”

Section: Introductionmentioning

confidence: 99%

Use of active peer benchmarks in assessing UK mutual fund performance and performance persistence

Mateus¹,

Mateus

Todorović

2019

The European Journal of Finance

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The majority of UK style-specific mutual funds either report a broad market index as their prospectus benchmark or give no benchmark at all-a practice that may be a) strategic, or b) cultural and attributable to the lack of UK style-specific indices (e.g., mid-cap-growth, smallcap-value). The choice of a broad market index as a benchmark can bias the inferences of a fund's performance and performance persistence. This study is the first to provide an alternative to style-specific indices in the UK, and suggests the use style-specific peer group benchmarks, following Hunter et al. (2014). Our sample comprises of 817 active UK longonly equity mutual funds allocated to nine Morningstar style categories (peer groups) during the period 1992-2016. We show that the funds with the most significant positive peer-groupadjusted alphas continued to perform well one year ahead, in terms of both parametric and non-parametric measures of persistence in performance. Moreover, persistence in performance is driven by both winner and loser funds. The results within each peer group are by and large consistent with these findings.

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“…In a subsequent study, Mateus et al (2019a) evaluate the impact of the mismatch between fund objectives and the prospectus benchmark for 1,281 US funds, using the S&P500 as the benchmark. Based on the adjusted-alpha methodology, their results show that, contrary to the traditional Carhart (1997) model where positive (negative) fund performance is related to a positive (negative) benchmark performance, when the Angelidis et al (2013) methodology is applied, the relationship is reversed, with a prevalence of negative adjusted alphas in the periods when the benchmark exhibits positive performance, thus changing the perception that investors have of the actual performance of mutual funds.…”

Section: Introductionmentioning

confidence: 99%

“…Although there are already some practical applications of the Angelidis et al ( 2013) methodology (e.g., Mateus et al, 2016Mateus et al, , 2019aChinthalapati et al, 2017;Cuthbertson et al, 2022), these are restricted to large mutual fund markets, like the US and UK ones. Therefore, one of the main contributions of this paper is that, to the best of our knowledge, it is the first to compute and analyze benchmark-adjusted alphas for funds domiciled in a small market, namely Portugal 1 .…”

Section: Introductionmentioning

confidence: 99%

Market crises and benchmark-adjusted fund alphas in a small market context

Lopes,

Leite,

Correia

et al. 2023

RGE

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Most mutual fund performance evaluation studies interpret fund alphas as the incremental performance of managers in relation to passive benchmark indices, which should exhibit statistically insignificant alphas. However, if these indices present significant non-zero alphas, standard (non-adjusted) fund alphas are biased. This paper investigates the impact of using benchmark-adjusted alphas to assess the performance of Portuguese-based mutual funds, investing in domestic and European equities. For the period 2000-2020, our results show that fund benchmarks exhibit significantly negative alphas, which lead to an underestimation of mutual fund performance when employing standard models. As a result, benchmark-adjusted alphas are significantly higher than unadjusted alphas for both fund categories, though the differences are larger for domestic than for European funds. We have also found that the impact of the benchmark-adjustment procedure depends on the state of markets. The domestic (European) benchmark exhibits considerably lower (higher) alphas during crisis than during non-crisis periods. During market crises, the differences between pre- and post-adjustment alphas are statistically significant only for domestic funds, whereas during non-crisis periods, both fund categories exhibit significant performance improvements. Our findings suggest that the benchmark-adjustment procedure has a higher impact when benchmark indices exhibit higher concentration.

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

Cited by 12 publications

References 27 publications

Does equity mutual fund factor-risk-shifting pay off? Evidence from the US

Does equity mutual fund factor-risk-shifting pay off? Evidence from the US

Use of active peer benchmarks in assessing UK mutual fund performance and performance persistence

Market crises and benchmark-adjusted fund alphas in a small market context

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