Determinants of Performance for Mortgage-Backed Securities Funds

This article examines the performance of mortgage-backed securities (MBS) mutual funds from January 1987 to June 1995. As a group, the MBS mutual funds underperform both the "Salomon and Lehman Brothers" MBS market benchmarks. The relative underperformance of the MBS mutual funds is due to poor securities selection and timing decisions. Fund expenses also contribute significantly to the underperformance, while fund load, turnover, management fees and other fund characteristics do not materially affect performance. The underperformance is found to be concentrated in several exceptionally bad months during the sample period. Testing indicates that the MBS mutual funds underperform the MBS benchmark during months of rising interest rates, but match the MBS benchmark during months of falling interest rates. Copyright American Real Estate and Urban Economics Association.