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

Author

Listed:
  • Daniel Buncic

    () (Institute of Mathematics & Statistics, University of St. Gallen)

  • Jon E. Eggins

    () (Russell Investment Group)

  • Robert J. Hill

    () (School of Economics, University of Graz)

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.

Suggested Citation

  • Daniel Buncic & Jon E. Eggins & Robert J. Hill, 2010. "Mutual Fund Style, Characteristic-Matched Performance Benchmarks and Activity Measures: A New Approach," Discussion Papers 2010-12, School of Economics, The University of New South Wales.
  • Handle: RePEc:swe:wpaper:2010-12
    as

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    File URL: http://research.economics.unsw.edu.au/RePEc/papers/2010-12.pdf
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    References listed on IDEAS

    as
    1. Fama, Eugene F & French, Kenneth R, 1992. " The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-465, June.
    2. 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, August.
    3. S.P. Kothari, 2001. "Evaluating Mutual Fund Performance," Journal of Finance, American Finance Association, vol. 56(5), pages 1985-2010, October.
    4. 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.
    5. Carhart, Mark M, 1997. " On Persistence in Mutual Fund Performance," Journal of Finance, American Finance Association, vol. 52(1), pages 57-82, March.
    6. Daniel, Kent, et al, 1997. " Measuring Mutual Fund Performance with Characteristic-Based Benchmarks," Journal of Finance, American Finance Association, vol. 52(3), pages 1035-1058, July.
    7. Brown, Stephen J. & Goetzmann, William N., 1997. "Mutual fund styles," Journal of Financial Economics, Elsevier, vol. 43(3), pages 373-399, March.
    8. 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.
    9. Marcin Kacperczyk & Clemens Sialm & Lu Zheng, 2005. "On the Industry Concentration of Actively Managed Equity Mutual Funds," Journal of Finance, American Finance Association, vol. 60(4), pages 1983-2011, August.
    10. Louis K. C. Chan & Stephen G. Dimmock & Josef Lakonishok, 2009. "Benchmarking Money Manager Performance: Issues and Evidence," Review of Financial Studies, Society for Financial Studies, vol. 22(11), pages 4553-4599, November.
    11. 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.
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    More about this item

    Keywords

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

    JEL classification:

    • C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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