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Mutual Fund Style, Characteristic-Matched Performance Benchmarks and Activity Measures: A New Approach

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  • Daniel Buncic

    ()

  • Jon E. Eggins

    ()

  • Robert J. Hill

    ()

Abstract

We propose a new approach for measuring mutual fund style and constructing characteristic-matched performance benchmarks that requires only portfolio holdings and two reference portfolios in each style dimension. The characteristic-matched performance benchmark literature typically follows a bottom-up approach by first matching individual stocks with benchmarks and then obtaining a portfolio’s excess return as a weighted average of the excess returns on each of its constituent stocks. Our approach is fundamentally different in that it matches portfolios and benchmarks directly. We illustrate our approach using portfolio holdings of 1183 fund managers over the period 2002-2009. We characterize the cross-section of fund manager styles and show how average style changes over time. The tracking error volatilities of our characteristic-matched benchmarks compare favorably with those of existing methods. Using our benchmarks we explore the link between activity and performance.

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Bibliographic Info

Paper provided by Department of Economics, University of St. Gallen in its series University of St. Gallen Department of Economics working paper series 2010 with number 2010-20.

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Length: 47 pages
Date of creation: Jun 2010
Date of revision:
Handle: RePEc:usg:dp2010:2010-20

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Keywords: Performance Measurement; Tailored Benchmark; Characteristic Matching; Size Profile; Growth Profile; Activity; Excess Return.;

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  1. Brown, Stephen J. & Goetzmann, William N., 1997. "Mutual fund styles," Journal of Financial Economics, Elsevier, vol. 43(3), pages 373-399, March.
  2. Marcin Kacperczyk & Clemens Sialm & Lu Zheng, 2004. "On the Industry Concentration of Actively Managed Equity Mutual Funds," NBER Working Papers 10770, National Bureau of Economic Research, Inc.
  3. Josef Lakonishok & Louis Chan & Stephen G. Dimmock, 2006. "Benchmarking Money Manager Performance: Issues and Evidence," NBER Working Papers 12461, National Bureau of Economic Research, Inc.
  4. Martijn Cremers & Antti Petajisto, 2006. "How Active is Your Fund Manager? A New Measure That Predicts Performance," Yale School of Management Working Papers amz2370, Yale School of Management, revised 01 May 2009.
  5. Fama, Eugene F & French, Kenneth R, 1992. " The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-65, June.
  6. K. J. Martijn Cremers & Antti Petajisto, 2009. "How Active Is Your Fund Manager? A New Measure That Predicts Performance," Review of Financial Studies, Society for Financial Studies, vol. 22(9), pages 3329-3365, September.
  7. Simone Brands & Stephen J. Brown & David R. Gallagher, 2005. "Portfolio Concentration and Investment Manager Performance-super-," International Review of Finance, International Review of Finance Ltd., vol. 5(3-4), pages 149-174.
  8. Carhart, Mark M, 1997. " On Persistence in Mutual Fund Performance," Journal of Finance, American Finance Association, vol. 52(1), pages 57-82, March.
  9. Russ Wermers, 2000. "Mutual Fund Performance: An Empirical Decomposition into Stock-Picking Talent, Style, Transactions Costs, and Expenses," Journal of Finance, American Finance Association, vol. 55(4), pages 1655-1703, 08.
  10. S.P. Kothari, 2001. "Evaluating Mutual Fund Performance," Journal of Finance, American Finance Association, vol. 56(5), pages 1985-2010, October.
  11. Daniel, Kent, et al, 1997. " Measuring Mutual Fund Performance with Characteristic-Based Benchmarks," Journal of Finance, American Finance Association, vol. 52(3), pages 1035-58, July.
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