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Best-performing US mutual fund families from 1993 to 2008: Evidence from a novel two-stage DEA model for efficiency decomposition

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  • Premachandra, I.M.
  • Zhu, Joe
  • Watson, John
  • Galagedera, Don U.A.

Abstract

When analyzing relative performance, especially at the institutional level, the traditional data envelopment analysis (DEA) models do not recognize vastly different and important activities as separate functions and therefore cannot identify which function may be the main source of inefficiency. We propose a novel two-stage DEA model that decomposes the overall efficiency of a decision-making unit into two components and demonstrate its applicability by assessing the relative performance of 66 large mutual fund families in the US over the period 1993–2008. By decomposing the overall efficiency into operational management efficiency and portfolio management efficiency components, we reveal the best performers, the families that deteriorated in performance, and those that improved in their performance over the sample period. We also make frontier projections for poorly performing mutual fund families and highlight how the portfolio managers have managed their funds relative to the others during financial crisis periods.

Suggested Citation

  • Premachandra, I.M. & Zhu, Joe & Watson, John & Galagedera, Don U.A., 2012. "Best-performing US mutual fund families from 1993 to 2008: Evidence from a novel two-stage DEA model for efficiency decomposition," Journal of Banking & Finance, Elsevier, vol. 36(12), pages 3302-3317.
  • Handle: RePEc:eee:jbfina:v:36:y:2012:i:12:p:3302-3317
    DOI: 10.1016/j.jbankfin.2012.07.018
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    References listed on IDEAS

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    Cited by:

    1. Galagedera, Don U.A., 2014. "Modeling risk concerns and returns preferences in performance appraisal: An application to global equity markets," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 33(C), pages 400-416.
    2. Kao, Chiang, 2014. "Network data envelopment analysis: A review," European Journal of Operational Research, Elsevier, vol. 239(1), pages 1-16.
    3. repec:taf:eurjfi:v:23:y:2017:i:6:p:457-473 is not listed on IDEAS
    4. Li, Yongjun & Lei, Xiyang & Dai, Qianzhi & Liang, Liang, 2015. "Performance evaluation of participating nations at the 2012 London Summer Olympics by a two-stage data envelopment analysis," European Journal of Operational Research, Elsevier, vol. 243(3), pages 964-973.
    5. Kao, Chiang, 2014. "Efficiency decomposition for general multi-stage systems in data envelopment analysis," European Journal of Operational Research, Elsevier, vol. 232(1), pages 117-124.
    6. repec:eee:jomega:v:77:y:2018:i:c:p:168-179 is not listed on IDEAS
    7. Galagedera, Don U.A. & Watson, John & Premachandra, I.M. & Chen, Yao, 2016. "Modeling leakage in two-stage DEA models: An application to US mutual fund families," Omega, Elsevier, vol. 61(C), pages 62-77.
    8. Babalos, Vassilios & Mamatzakis, Emmanuel C. & Matousek, Roman, 2015. "The performance of US equity mutual funds," Journal of Banking & Finance, Elsevier, vol. 52(C), pages 217-229.
    9. repec:gam:jeners:v:10:y:2017:i:9:p:1418-:d:112143 is not listed on IDEAS
    10. Kao, Chiang & Hwang, Shiuh-Nan, 2014. "Multi-period efficiency and Malmquist productivity index in two-stage production systems," European Journal of Operational Research, Elsevier, vol. 232(3), pages 512-521.
    11. Antonella Basso & Stefania Funari, 2017. "The role of fund size in the performance of mutual funds assessed with DEA models," The European Journal of Finance, Taylor & Francis Journals, vol. 23(6), pages 457-473, May.
    12. Lu, Wen-Min & Liu, John S. & Kweh, Qian Long & Wang, Chung-Wei, 2016. "Exploring the benchmarks of the Taiwanese investment trust corporations: Management and investment efficiency perspectives," European Journal of Operational Research, Elsevier, vol. 248(2), pages 607-618.
    13. An, Qingxian & Yan, Hong & Wu, Jie & Liang, Liang, 2016. "Internal resource waste and centralization degree in two-stage systems: An efficiency analysis," Omega, Elsevier, vol. 61(C), pages 89-99.
    14. repec:spr:orspec:v:39:y:2017:i:3:d:10.1007_s00291-017-0475-1 is not listed on IDEAS
    15. repec:eee:jomega:v:71:y:2017:i:c:p:114-128 is not listed on IDEAS
    16. Vassilios Babalos & Michael Doumpos & Nikolaos Philippas & Constantin Zopounidis, 2015. "Towards a Holistic Approach for Mutual Fund Performance Appraisal," Computational Economics, Springer;Society for Computational Economics, vol. 46(1), pages 35-53, June.
    17. Ruiyue Lin & Zhiping Chen & Qianhui Hu & Zongxin Li, 0. "Dynamic network DEA approach with diversification to multi-period performance evaluation of funds," OR Spectrum: Quantitative Approaches in Management, Springer;Gesellschaft für Operations Research e.V., vol. 0, pages 1-40.
    18. Chiu, Ching-Ren & Chiu, Yung-Ho & Chen, Yu-Chuan & Fang, Chen-Ling, 2016. "Exploring the source of metafrontier inefficiency for various bank types in the two-stage network system with undesirable output," Pacific-Basin Finance Journal, Elsevier, vol. 36(C), pages 1-13.
    19. repec:eee:ejores:v:269:y:2018:i:1:p:111-131 is not listed on IDEAS

    More about this item

    Keywords

    Data envelopment analysis efficiency decomposition; Operational management efficiency; Portfolio management efficiency; Efficiency of mutual fund families;

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • C67 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Input-Output Models

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