Mutual Funds |Selection based on Fund Characteristics
The popular investment strategy in the literature is to use only past performance to select mutual funds. We investigate whether an investor can select superior funds by additionally using fund characteristics. After considering the fund fees, we find that combining information on past performance, turnover ratio, and ability produces a yearly excess net return of 8.0%, whereas an investment strategy that uses only past performance generates 7.1%. Adjusting for systematic risks, and then using fund characteristics, increases yearly alpha significantly from 0.8% to 1.7%. The strategy that also uses fund characteristics requires less turnover.
|Keywords||investment strategy, mutual funds|
|JEL||Portfolio Choice; Investment Decisions (jel G11), Information and Market Efficiency; Event Studies (jel G14), General Financial Markets: Other (jel G19)|
|Persistent URL||dx.doi.org/10.1111/j.1475-6803.2010.01270.x, hdl.handle.net/1765/21590|
|Series||ERIM Article Series (EAS)|
|Journal||The Journal of Financial Research|
Budiono, D.P, & Martens, M.P.E. (2010). Mutual Funds |Selection based on Fund Characteristics. The Journal of Financial Research, 33(3), 249–265. doi:10.1111/j.1475-6803.2010.01270.x