Benchmark-adjusted performance of US equity mutual funds and the issue of prospectus benchmarks

This study examines the impact of mismatch between prospectus benchmark and fund objectives on benchmark-adjusted fund performance and ranking in a sample of 1281 US equity mutual funds. All funds in our sample report S&P500 index as a prospectus benchmark, yet 2/3 of those are placed in the Morningstar category with risk and objectives different to those of the S&P500 index. We identify more appropriate ‘category benchmarks’ for those mismatched funds and obtain their benchmark-adjusted alphas using recent Angelidis et al. (J Bank Finance 37(5):1759–1776, 2013) methodology. We find that S&P500-adjusted alphas are higher than ‘category benchmark’-adjusted alphas in 61.2% of the cases. In terms of fund quartile rankings, 30% of winner funds lose that status when the prospectus benchmark is substituted with the one better matching their objectives. In the remaining performance quartiles, there is no clear advantage of using S&P 500 as a benchmark. Hence, the prospectus benchmark can mislead investors about fund’s relative performance and ranking, so any reference to performance in a fund’s prospectus should be treated with caution

Use of Active Peer Benchmarks in assessing UK mutual fund performance and performance persistence

The majority of UK style-specific mutual funds either report a broad market index as their prospectus benchmark or give no benchmark at all — a practice that may be a) strategic, or b) cultural and attributable to the lack of UK style-specific indices (e.g., mid-cap-growth, small-cap-value). The choice of a broad market index as a benchmark can bias the inferences of a fund’s performance and performance persistence. This study is the first to provide an alternative to style-specific indices in the UK, and suggests the use style-specific peer group benchmarks, following Hunter et al. (2014). Our sample comprises of 817 active UK long-only equity mutual funds allocated to nine Morningstar style categories (peer groups) during the period 1992–2016. We show that the funds with the most significant positive peer-group-adjusted alphas continued to perform well one year ahead, in terms of both parametric and non-parametric measures of persistence in performance. Moreover, persistence in performance is driven by both winner and loser funds. The results within each peer group are by and large consistent with these findings

UK equity mutual fund alphas make a comeback

In this study, we re-visit the performance of 887 active UK equity mutual funds using a new approach proposed by Angelidis, Giamouridis, and Tessaromatis. The authors argue that mutual funds stock selection is driven by the benchmark index, so if the benchmark generates alpha, there will be a bias in interpretation of manager's stock-picking ability. In their model, the alpha of a fund is adjusted by the benchmark's alpha. By applying this method, we eliminate bias inflicted by the persistently negative alphas of FTSE 100 Index in the period 1992-2013. We find that adjusted Fama-French and Carhat alphas of UK equity mutual funds are higher than those implied by the standard three- and four-factor models and are overall positive, contrary to most of the existing literature on UK fund performance. This result is consistent across funds' investment styles and robust to the use of FTSE Small Cap as benchmark for a sub-sample of small cap funds

Review of new trends in the literature on factor models and mutual fund performance

In this paper we provide critical review of recent developments in the mutual fund performance evaluation literature. The new literature centres around two main themes: enhancing explanatory power of the standard Fama-French-Carhart factor models by augmenting them with different factors and altering standard models to account for presence of non-zero alphas in passive indices used as fund benchmarks. The latter includes the literature providing solutions for scenarios in which those benchmarks do not match fund objectives. We find that in the plethora of suggested ‘missing’ factors, not one can be universally used to explain all anomalies or price all stocks. We also find that new models that adjust a fund's standard Carhart alpha for alpha of its benchmark or for commonalities in its peer–group, provide additional information on fund performance to that given by the standard models. Specifically, these models give account of fund's relative performance - to the benchmark or the peer-group, which is of use to investors

Vulnerability assessment of Angolan university web applications

Vulnerability assessment is one of the technical procedures that can help prevent serious security breaches, which, when exploited, can undermine brand credibility and or the continuity of a business. Universities hold and process important relevant and sensitive student and staff information appealing to attackers and might affect the organisations' credibility if such information is disclosed. This work presents a study conducted to assess the security status of the Angolan universities' web applications, identifying the most frequent security vulnerabilities and their criticality, based on OWASP Top 10 and CWE Top 25 references to identify and validate the findings discovered during the automatic vulnerability assessment process.info:eu-repo/semantics/acceptedVersio

US sector rotation with five-factor Fama–French alphas

In this paper, we investigate the risk-adjusted performance of US sector portfolios and sector rotation strategy using the alphas from the Fama–French five-factor model. We find that five-factor model fits better the returns of US sector portfolios than the three-factor model, but that significant alphas are still present in all the sectors at some point in time. In the full sample period, 50% of sectors generate significant five-factor alpha. We test whether such alpha signifies a true sector out/underperformance by applying simple long-only and long-short sector rotation strategies. Our long-only sector rotation strategy that buys a sector with a positive five-factor alpha generates four times higher Sharpe ratio than the S & P 500 buy-and-hold. If the strategy is adjusted to switch to the risk-free asset in recessions, the Sharpe ratio achieved is tenfold that of the buy-and-hold. The long-short strategy fares less well

A guide to survival of momentum in UK style portfolios

In this study we estimate the survival time of momentum in six UK style portfolio returns from October 1980 to June 2014. We utilise the Kaplan-Meier estimator, a non-parametric method that measures the probability that momentum will persist beyond the present month. This probability enables us to compute the average momentum survival time for each of the six style portfolios. Discrepancies between these empirical mean survival times and those implied by theoretical models [Random Walk and ARMA (1, 1)] show that there is scope for profiting from momentum trading. We illustrate this by forming long-only, short-only and long-short trading strategies that exploit positive and negative momentum and their average survival time. These trading strategies yield considerably higher Sharpe ratios than the comparative buy-and-hold strategies at a feasible level of transaction costs. This result is most pronounced for the long/short strategies. Our findings remain robust during the 2007/2008 financial crisis and the aftermath, suggesting that Kaplan-Meier estimator is a powerful tool for designing a profitable momentum strategy

A tale of two states: asymmetries in the UK small, value and momentum premiums

This article performs comparative analysis of the asymmetries in size, value and momentum premium and their macroeconomic determinants over the UK economic cycles, using Markov switching approach. We associate Markov switching regime 1 with economic upturn and regime 2 with economic downturn. We find clear evidence of cyclical variations in the three premiums, most notable being that in the size premium, which changes from positive in expansions to negative in recessions. Macroeconomic indicators prompting such cyclicality the most are variables that proxy credit market conditions, namely the interest rates, term structure and credit spread. Overall, macro factors tend to have more significant impact on the three premiums during economic downturns. The results are robust to the choice of information variable used in modelling transition probabilities of the two-stage Markov switching model. We show that exploiting cyclicality in premiums proves particularly profitable for portfolios featuring small cap stocks in recessions at a feasible level of transaction costs