The Fund Synthetic Index: An Alternative Benchmark for Mutual Funds

Evaluation of the performance of investment funds is a topic of considerable interest to practitioners and academic researchers. Performance indicators of financial places have long posed interesting challenges with regards to funds investors, but also to legal regulatory authorities. The two major issues that need to be addressed in any performance study are how to choose an appropriate benchmark for comparison and how to adjust a fund’s return for risk. Indeed, investors desire information about representative market indexes as a norm to evaluate the performance of their portfolios. MSCI Indexes are frequently used by institutional investors around the world as benchmarks to decide allocation of funds across asset classes and regions. Despite this wide acceptance, MSCI country index has in its original application a number of drawbacks and limitations. The main problems can be traced to the presence of usual biases, such as sampling, survivorship and instant history biases (Fung and Shieh, 2002), involving problems in the aggregation procedure. Thus, one can explain why certain financial places are less representative, specifically for funds distribution places. Some results also indicate problems related to misclassification in mutual funds (Sharpe, 1992). Each of these phenomena can have a significant impact on international diversification for fund managers. Based on these empirical findings, Ferreira, Miguel and Ramos (2007) examine cross-country mutual fund performance using several alternative benchmark models including a domestic and an international version of the Carhart (1997) four-factor model. Using multiple regressions, they obtain significant determinants explaining funds performance, like the funds size, the fees, the management style and so on.