- Paper Title: Mutual fund performance evaluation with a focus on particular investment styles
- Department Affiliation: Macquarie Graduate School of Management (MGSM)
My research relates to mutual fund performance evaluation with a focus on particular investment styles. My first study investigates the overall level of “quality” of the stocks held by active mutual funds in the United States. Quality is defined based on 14 individual signals across four categories; profitability, variability, financial health and operating efficiency. These individual signals are combined to form a composite Quality Score, called a Q-Score. The study is extensive with the portfolio holdings of 2,913 distinct funds examined over 1990-2009.
The evidence shows that stocks with the lowest Q-Scores perform particularly poorly, with a mean DGTW alpha of -14.57%, significant at the 5% level, reported for stocks in the lowest decile of quality. Furthermore, there is a direct (inverse) relationship between size (volatility) and the Q-Score. The funds which hold the lowest quality stocks exhibit significant underperformance. In particular, funds in portfolios one and two have average DGTW-adjusted returns of -3.35% and -1.39%, which are significant at the 5% and 10% levels, respectively. Evidence of the downside protection offered by quality stocks amidst stressful market conditions is also determined. Furthermore, lower quality funds have higher turnover and expenses and are slightly younger on average.
Following on from this first study, my current research involves determining what portions of active fund managers’ returns are attributable to systematic style influences (value, quality, momentum, low-volatility etc.). The purpose is to determine whether the returns generated by active managers may be attained more cheaply by using passive style counterparts.