Measuring mutual fund performance with characteristic-based benchmarks

Article Abstract:

This article develops and applies new measures of portfolio performance which use benchmarks based on the characteristics of stocks held by the portfolios that are evaluated. Specifically, the benchmarks are constructed from the returns of 125 passive portfolios that are matched with stocks held in the evaluated portfolio on the basis of the market capitalization, book-to-market, and prior-year return characteristics of those stocks. Based on these benchmarks, "Characteristic Timing" and "Characteristic Selectivity" measures are developed that detect, respectively, whether portfolio managers successfully time their portfolio weightings on these characteristics and whether managers can select stocks that outperform the average stock having the same characteristics. We apply these measures to a new database of mutual fund holdings covering over 2500 equity funds from 1975 to 1994. Our results show that mutual funds, particularly aggressive-growth funds, exhibit some selectivity ability, but that funds exhibit no characteristic timing ability. (Reprinted by permission of the publisher.)

Investment Offices, Investment Companies, Open-End Investment Funds, Performance, Measurement, Portfolio management, Mutual funds

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Evidence on the characteristics of cross sectional variation in stock returns

Article Abstract:

Firm sizes and book-to-market ratios are both highly correlated with the average returns of common stocks. Fama and French (1993) argue that the association between these characteristics and returns arise because the characteristics are proxies for nondiversifiable factor risk. In contrast, the evidence in this article indicates that the return premia on small capitalization and high book-to-market stocks does not arise because of the comovements of these stocks with pervasive factors. It is the characteristics rather that the covariance structure of returns that appear to explain the cross-sectional variation in stock returns. (Reprinted by permission of the publisher.)

Research, Prices and rates, Stock prices, Return on investment, Rate of return, Corporate size

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Explaining the cross-section of stock returns in Japan: factors or characteristics?

Article Abstract:

This article evaluates the Japanese stock returns, which are more closely related than American ones, to test whether return premia occur because characteristics are proxies for covariance with price factors. The authors reject the three factor model, but do not reject the characteristic model.

Japan, Statistical Data Included, Evaluation, Stock-exchange, Stock exchanges

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