Recent studies link mutual fund performance to measures of active management, and this evidence often takes the form of large spreads in unconditional alphas for characteristic-sorted portfolios. Unconditional benchmarks can, however, produce misleading inferences on managerial skill for strategies that exhibit substantial turnover and unstable factor exposures. We propose a performance attribution model that accounts for predictable changes in portfolio style. Compared to existing methods, our benchmarks yield superior tracking performance and a more powerful statistical assessment of abnormal returns. We re-evaluate six active management proxies using our method and conclude that these measures are largely unrelated to managerial ability.
Conditional Benchmarks and Predictors of Mutual Fund Performance
We thank Ivo Welch (the Editor), three anonymous referees, Yinfei Chen, Brad Goldie, George Jiang, Haim Kassa, Jerchern Lin, Alexey Malakhov, Marno Verbeek, Xiaolu Wang, Ryan Whitby, and seminar participants at Iowa State University, Macquarie University, Miami University, the University of Arkansas, the University of Iowa, the University of New South Wales, Utah State University, the 2016 Financial Management Association meetings (Las Vegas), the 2016 India Finance Conference (Ahmedabad), and the 2017 Asset Management Conference (Berlin) for helpful comments and suggestions.
Cederburg S, O’Doherty MS, Savin NE, Tiwari A (2018), "Conditional Benchmarks and Predictors of Mutual Fund Performance". Critical Finance Review, Vol. 7 No. 2 pp. 331–372, doi: https://doi.org/10.1561/104.00000062
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