This paper aims to evaluate the risk‐adjusted performance of US‐based international equity funds using objective statistical measures grounded in modern portfolio theory, and to present the results in a manner which is easily understood by the average investor.
This study evaluates the performance of 50 large US‐based international equity funds using risk‐adjusted returns during 1994‐2003. In particular, a relatively new risk‐adjusted performance measure (M squared), first proposed by Franco Modigliani and Leah Modigliani in 1997, is used to evaluate these equity funds.
The empirical results show that the funds with the highest average returns may lose their attractiveness to investors once the degree of risk embedded in the fund has been factored into the analysis. Conversely, some funds, whose average (unadjusted) returns do not stand out, may look very attractive once their low risk is factored into their performance.
It may be worthwhile to examine the effects of factors such as fund manager compensation, service fees, corporate governance metrics, and overweighting in risky countries/regions on the performance of international equity funds.
The evidence presented in this study can be used as input in decision making by investors who are exploring the possibility of participating in the global stock market via international equity funds.
This paper is one of the first studies that apply the new M squared measure to evaluate the performance of international equity funds using both domestic and international benchmark indices. Various other performance metrics are also utilized including Sharpe and Treynor measures, and Jensen's Alpha.
