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

Predicting spectral features in galaxy spectra from broad-band photometry

We explore the prospects of predicting emission line features present in galaxy spectra given broad-band photometry alone. There is a general consent that colours, and spectral features, most notably the 4000 A break, can predict many properties of galaxies, including star formation rates and hence they could infer some of the line properties. We argue that these techniques have great prospects in helping us understand line emission in extragalactic objects and might speed up future galaxy redshift surveys if they are to target emission line objects only. We use two independent methods, Artifical Neural Neworks (based on the ANNz code) and Locally Weighted Regression (LWR), to retrieve correlations present in the colour N-dimensional space and to predict the equivalent widths present in the corresponding spectra. We also investigate how well it is possible to separate galaxies with and without lines from broad band photometry only. We find, unsurprisingly, that recombination lines can be well predicted by galaxy colours. However, among collisional lines some can and some cannot be predicted well from galaxy colours alone, without any further redshift information. We also use our techniques to estimate how much information contained in spectral diagnostic diagrams can be recovered from broad-band photometry alone. We find that it is possible to classify AGN and star formation objects relatively well using colours only. We suggest that this technique could be used to considerably improve redshift surveys such as the upcoming FMOS survey and the planned WFMOS survey.Comment: 10 pages 7 figures summitted to MNRA