Yes, the choice of performance measure does matter for ranking of us mutual funds

Abstract

Recent literature in performance evaluation has focused on preferences and characteristics of returns' distribution that go beyond mean and variance world. However, Eling (2008) compared the Sharpe ratio with some of these performance measures, and found virtually identical rank ordering using mutual fund data. This paper compares 13 performance measures with the traditional Sharpe Ratio using a sample of US Fixed-Income, Equity and Asset Allocation Mutual Funds. Results show that performance measures based on absolute reward-risk ratios have similar rankings, when the numerator (mean excess return) is the same. However, when we move to other types of performances measures, results may be significantly different. This is the case of the Manipulation-Proof Performance Measure (MPPM), Upside Potential Ratio, and Appraisal Ratio. Results are especially different for the MPPM. Robustness checks show that some of the performance measures are very sensitive to parameters' changes. Therefore, the choice of the performance measure is actually important for mutual fund ranking and selection. As a consequence, we argue that the use of several performance measures and rankings have a positive impact on the mutual fund's industry, reducing concentration.Int. J. Fin. Econ. 17: 61-72 (2012) 2. As pointed out by Noether (1981): 'The facts are that it is no easy matter to assign an operational interpretation to the Spearman coefficient. The Kendall coefficient, on the other hand, has an intuitively simple interpretation. What is more, its algebraic structure is much simpler than that of the Spearman coefficient. It can even be computed from the actual observations without first converting them to ranks.'

Can cooperative game theory solve the low‐risk puzzle?

“…Because variance has also been criticized as being impacted by events with positive effects for investors (see Yan et al, ), our second simulation study focuses on classic downside risk measures (lower partial moments, value at risk, and drawdowns) that have become very popular in investment practice (see Lagoarde‐Segot and Lucey, ; Ornelas et al, ; Stoyanov et al, ). Compared with variance, analytically deriving an expression for portfolio risk based on such measures can be difficult if not impossible (without highly specific return process assumptions).…”

Performance ranking (dis)similarities in commodity markets

“…By calculating the maximum upgrade, maximum downgrade, mean absolute change, and standard deviation of the change in the rankings, he argues that a high rank correlation coefficient does not necessarily imply almost identical rank orders, because there are funds that show substantial changes in ranking if the performance measure is changed from the Sharpe ratio to an alternative measure. 2 Ornelas, Silva Júnior, and Fernandes (2012) reinvestigate the findings of Eling (2008) for mutual funds and suggest that performance measures do not yield similar rankings if their reward measures are different (e.g., when the mean excess return is replaced…”

Impact on the Rankings of Mutual Funds Due to Choice of Performance Measure: An Asian Perspective

“…Eling and Schuhmacher (2007) use these ratios in their study along with Sharpe ratio to estimate the correlations among them. These ratios belong to the same category of downside risk-adjusted measures, having similar characteristics, which may be the reason for similar rankings (Ornelas, Silva Júnior and Fernandes 2012).…”