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Relative Performance Evaluation of Mutual Funds: A Non‐Parametric Approach

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  • Yoon K. Choi
  • B.P.S. Murthi

Abstract

We propose an alternative mutual fund performance index which addresses the benchmark problem and controls for economies of scale in managing mutual funds. We advance a new concept of ‘return‐cost’ efficiency as another important element in evaluating portfolio management, in addition to the mean‐variance efficiency concept. Our index based on a non‐parametric estimation is shown to be similar to the Sharpe index with multiple slopes (or factors). We have shown that all fund categories, except income funds, have similar average efficiency scores after controlling for economies of scale. Most funds operate in increasing returns to scale and seem to be successful in holding mean‐variance efficient portfolios, but unsuccessful in allocating transaction costs efficiently, evidenced by excessive turnovers and loads.

Suggested Citation

  • Yoon K. Choi & B.P.S. Murthi, 2001. "Relative Performance Evaluation of Mutual Funds: A Non‐Parametric Approach," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 28(7‐8), pages 853-876, September.
    • Handle: RePEc:bla:jbfnac:v:28:y:2001:i:7-8:p:853-876
    DOI: 10.1111/1468-5957.00396
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    Cited by:

    1. N. Kreander & R.H. Gray & D.M. Power & C.D. Sinclair, 2005. "Evaluating the Performance of Ethical and Non‐ethical Funds: A Matched Pair Analysis," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 32(7‐8), pages 1465-1493, September.
    2. Solórzano-Taborga, Pablo & Alonso-Conde, Ana Belén & Rojo-Suárez, Javier, 2018. "Efficiency and Persistence of Spanish Absolute Return Funds || Eficiencia y persistencia de los fondos de retorno absolutos españoles," Revista de Métodos Cuantitativos para la Economía y la Empresa = Journal of Quantitative Methods for Economics and Business Administration, Universidad Pablo de Olavide, Department of Quantitative Methods for Economics and Business Administration, vol. 25(1), pages 186-214, Junio.
    3. Kerstens, Kristiaan & Mounir, Amine & de Woestyne, Ignace Van, 2011. "Non-parametric frontier estimates of mutual fund performance using C- and L-moments: Some specification tests," Journal of Banking & Finance, Elsevier, vol. 35(5), pages 1190-1201, May.
    4. repec:ies:wpaper:e201218 is not listed on IDEAS
    5. Mahendra Raj & Md Hamid Uddin, 2016. "Mutual Fund Ratings and Efficiency: An Examination of the Relationship," Accounting and Finance Research, Sciedu Press, vol. 5(1), pages 202-202, February.
    6. Sevgi Eda Tuzcu & Emrah Ertugay, 2020. "Is size an input in the mutual fund performance evaluation with DEA?," Eurasian Economic Review, Springer;Eurasia Business and Economics Society, vol. 10(4), pages 635-659, December.
    7. Galagedera, Don U.A. & Fukuyama, Hirofumi & Watson, John & Tan, Eric K.M., 2020. "Do mutual fund managers earn their fees? New measures for performance appraisal," European Journal of Operational Research, Elsevier, vol. 287(2), pages 653-667.
    8. Carlos S�nchez-Gonz�lez & Jos� Luis Sarto & Luis Vicente, 2013. "The efficiency of Spanish mutual funds companies: A slacks-based measure approach," Documentos de Trabajo dt2013-01, Facultad de Ciencias Económicas y Empresariales, Universidad de Zaragoza.
    9. Carla Oliveira Henriques & Maria Elisabete Neves & Licínio Castelão & Duc Khuong Nguyen, 2022. "Assessing the performance of exchange traded funds in the energy sector: a hybrid DEA multiobjective linear programming approach," Annals of Operations Research, Springer, vol. 313(1), pages 341-366, June.

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