Predicting the relative performance of actively managed equity mutual funds using diverse performance evaluation techniques

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Abstract

Mutual fund performance evaluation has seen an ever-growing interest for research amongst industry and academicians alike. In this paper an attempt has been made to compare and correlate global actively managed equity mutual funds’ performance across time intervals, to evaluate and establish how predicting future performance can be made meaningful for investors using analysis of historical data based on monthly net asset values (NAVs) (March 2009–March 2021). Of the top 500 global equity mutual funds based on market-cap (on March 31, 2021), the paper evaluated 180 actively managed funds adding up to approximately USD 5 trillion of the fund assets as of March 31, 2021. The research gap which the paper aims to fill is to bring under one umbrella, prediction analysis using performance measures, downside risk measures, style factor analysis, and market timing models. For sampled equity funds various performance ratios and style attributes were computed and compared across periods for their relative performance. Relative performance was found to be stable (at 1% significance level) across periods and hence predictable. A portfolio of funds constructed optimally using historical performance was seen to be in the top quartile ex-post performance in the subsequent period. However, it was found that the market timing abilities of fund managers were unstable across periods and could not be used for predicting performance. Based on the study findings, it would be appropriate for investors to use the relative past performance of the funds and their style attribute analysis for the future allocation of investible surplus across these funds.

Keywords: Sharpe, Treynor, Jensen’s Alpha, M-Squared, Appraisal Ratio, Treynor-Mazuy, Carhart Model

Authors’ individual contribution: Conceptualization — A.D. and N.V.; Methodology — A.D. and N.V.; Formal Analysis — A.D. and N.V.; Investigation — A.D. and N.V.; Resources — A.D. and N.V.; Writing — Original Draft — A.D. and N.V.; Writing — Review & Editing — A.D. and N.V.

Declaration of conflicting interests: The Authors declare that there is no conflict of interest.

JEL Classification: G0, G11, G12, G15

Received: 26.06.2021
Accepted: 04.10.2021
Published online: 07.10.2021

How to cite this paper: Damani, A., & Vaidya, N. (2021). Predicting the relative performance of actively managed equity mutual funds using diverse performance evaluation techniques. Corporate Ownership & Control, 19(1), 69–83. https://doi.org/10.22495/cocv19i1art6