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Benchmark-adjusted performance of US equity mutual funds and the issue of prospectus benchmarks

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  • Irina Bezhentseva Mateus

    (University of London)

  • Cesario Mateus

    (University of London)

  • Natasa Todorovic

    (University of London)

Abstract

This study examines the impact of mismatch between prospectus benchmark and fund objectives on benchmark-adjusted fund performance and ranking in a sample of 1281 US equity mutual funds. All funds in our sample report S&P500 index as a prospectus benchmark, yet 2/3 of those are placed in the Morningstar category with risk and objectives different to those of the S&P500 index. We identify more appropriate ‘category benchmarks’ for those mismatched funds and obtain their benchmark-adjusted alphas using recent Angelidis et al. (J Bank Finance 37(5):1759–1776, 2013) methodology. We find that S&P500-adjusted alphas are higher than ‘category benchmark’-adjusted alphas in 61.2% of the cases. In terms of fund quartile rankings, 30% of winner funds lose that status when the prospectus benchmark is substituted with the one better matching their objectives. In the remaining performance quartiles, there is no clear advantage of using S&P 500 as a benchmark. Hence, the prospectus benchmark can mislead investors about fund’s relative performance and ranking, so any reference to performance in a fund’s prospectus should be treated with caution.

Suggested Citation

  • Irina Bezhentseva Mateus & Cesario Mateus & Natasa Todorovic, 2019. "Benchmark-adjusted performance of US equity mutual funds and the issue of prospectus benchmarks," Journal of Asset Management, Palgrave Macmillan, vol. 20(1), pages 15-30, February.
  • Handle: RePEc:pal:assmgt:v:20:y:2019:i:1:d:10.1057_s41260-018-0101-z
    DOI: 10.1057/s41260-018-0101-z
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    References listed on IDEAS

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    Cited by:

    1. Cesario Mateus & Irina B. Mateus & Marco Soggiu, 2020. "Do smart beta ETFs deliver persistent performance?," Journal of Asset Management, Palgrave Macmillan, vol. 21(5), pages 413-427, September.
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    More about this item

    Keywords

    Prospectus benchmark selection; Mutual fund benchmark mismatch; Benchmark-adjusted alphas; Performance ranking;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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