IDEAS home Printed from https://ideas.repec.org/a/bla/jfnres/v33y2010i3p249-265.html
   My bibliography  Save this article

Mutual Funds Selection Based On Funds Characteristics

Author

Listed:
  • Diana P. Budiono
  • Martin Martens

Abstract

The popular investment strategy in the literature is to use only past performance to select mutual funds. We investigate whether an investor can select superior funds by additionally using fund characteristics. After considering the fund fees, we find that combining information on past performance, turnover ratio, and ability produces a yearly excess net return of 8.0%, whereas an investment strategy that uses only past performance generates 7.1%. Adjusting for systematic risks, and then using fund characteristics, increases yearly alpha significantly from 0.8% to 1.7%. The strategy that also uses fund characteristics requires less turnover.

Suggested Citation

  • Diana P. Budiono & Martin Martens, 2010. "Mutual Funds Selection Based On Funds Characteristics," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 33(3), pages 249-265, September.
    • Handle: RePEc:bla:jfnres:v:33:y:2010:i:3:p:249-265
    DOI: 10.1111/j.1475-6803.2010.01270.x
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/j.1475-6803.2010.01270.x
    Download Restriction: no
    File URL: https://libkey.io/10.1111/j.1475-6803.2010.01270.x?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Pastor, Lubos & Stambaugh, Robert F., 2002. "Mutual fund performance and seemingly unrelated assets," Journal of Financial Economics, Elsevier, vol. 63(3), pages 315-349, March.
    2. Carhart, Mark M, 1997. "On Persistence in Mutual Fund Performance," Journal of Finance, American Finance Association, vol. 52(1), pages 57-82, March.
    3. Joseph Chen & Harrison Hong & Ming Huang & Jeffrey D. Kubik, 2004. "Does Fund Size Erode Mutual Fund Performance? The Role of Liquidity and Organization," American Economic Review, American Economic Association, vol. 94(5), pages 1276-1302, December.
    4. Huij, Joop & Verbeek, Marno, 2007. "Cross-sectional learning and short-run persistence in mutual fund performance," Journal of Banking & Finance, Elsevier, vol. 31(3), pages 973-997, March.
    5. Nicolas P. B. Bollen, 2005. "Short-Term Persistence in Mutual Fund Performance," The Review of Financial Studies, Society for Financial Studies, vol. 18(2), pages 569-597.
    6. Fama, Eugene F & MacBeth, James D, 1973. "Risk, Return, and Equilibrium: Empirical Tests," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 607-636, May-June.
    7. repec:bla:jfinan:v:55:y:2000:i:4:p:1655-1703 is not listed on IDEAS
    8. Grinblatt, Mark & Titman, Sheridan, 1994. "A Study of Monthly Mutual Fund Returns and Performance Evaluation Techniques," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 29(3), pages 419-444, September.
    9. Marcin Kacperczyk & Clemens Sialm & Lu Zheng, 2005. "On the Industry Concentration of Actively Managed Equity Mutual Funds," Journal of Finance, American Finance Association, vol. 60(4), pages 1983-2011, August.
    10. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
    11. Russ Wermers, 2000. "Mutual Fund Performance: An Empirical Decomposition into Stock‐Picking Talent, Style, Transactions Costs, and Expenses," Journal of Finance, American Finance Association, vol. 55(4), pages 1655-1695, August.
    12. Hendricks, Darryll & Patel, Jayendu & Zeckhauser, Richard, 1993. "Hot Hands in Mutual Funds: Short-Run Persistence of Relative Performance, 1974-1988," Journal of Finance, American Finance Association, vol. 48(1), pages 93-130, March.
    13. Elton, Edwin J & Gruber, Martin J & Blake, Christopher R, 1996. "The Persistence of Risk-Adjusted Mutual Fund Performance," The Journal of Business, University of Chicago Press, vol. 69(2), pages 133-157, April.
    14. repec:bla:jfinan:v:59:y:2004:i:1:p:261-288 is not listed on IDEAS
    15. Miles Livingston & Edward S. O'Neal, 1998. "The Cost Of Mutual Fund Distribution Fees," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 21(2), pages 205-218, June.
    16. Kosowski, Robert & Naik, Narayan Y. & Teo, Melvyn, 2007. "Do hedge funds deliver alpha? A Bayesian and bootstrap analysis," Journal of Financial Economics, Elsevier, vol. 84(1), pages 229-264, April.
    17. Livingston, Miles & O'Neal, Edward S, 1998. "The Cost of Mutual Fund Distribution Fees," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 21(2), pages 205-218, Summer.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Wolfgang Bessler & Thomas Conlon & Diego Víctor de Mingo‐López & Juan Carlos Matallín‐Sáez, 2022. "Mutual fund performance and changes in factor exposure," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 45(1), pages 17-52, March.
    2. Stafylas, Dimitrios & Andrikopoulos, Athanasios, 2020. "Determinants of hedge fund performance during ‘good’ and ‘bad’ economic periods," Research in International Business and Finance, Elsevier, vol. 52(C).
    3. Machnik Jadwiga, 2020. "Performance Persistence and Gamma Convergence in Absolute Return Funds in Poland Over the Period 2011-2018," Financial Sciences. Nauki o Finansach, Sciendo, vol. 25(2-3), pages 41-54, September.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Bessler, Wolfgang & Blake, David & Lückoff, Peter & Tonks, Ian, 2010. "Why does mutual fund performance not persist? The impact and interaction of fund flows and manager changes," MPRA Paper 34185, University Library of Munich, Germany.
    2. Nanda, Vikram K. & Wang, Z. Jay & Zheng, Lu, 2009. "The ABCs of mutual funds: On the introduction of multiple share classes," Journal of Financial Intermediation, Elsevier, vol. 18(3), pages 329-361, July.
    3. Yee Loon, 2011. "Model uncertainty, performance persistence and flows," Review of Quantitative Finance and Accounting, Springer, vol. 36(2), pages 153-205, February.
    4. Lee, John Byong-Tek & Ma, Jun & Margaritis, Dimitris & Yang, Wanyi, 2023. "Is anti-herding always a smart choice? Evidence from mutual funds," International Review of Financial Analysis, Elsevier, vol. 90(C).
    5. Matallín-Sáez, Juan Carlos & Soler-Domínguez, Amparo & Tortosa-Ausina, Emili, 2016. "On the robustness of persistence in mutual fund performance," The North American Journal of Economics and Finance, Elsevier, vol. 36(C), pages 192-231.
    6. Agnesens, Julius, 2013. "A statistically robust decomposition of mutual fund performance," Journal of Banking & Finance, Elsevier, vol. 37(10), pages 3867-3877.
    7. Jiang, George J. & Zaynutdinova, Gulnara R. & Zhang, Huacheng, 2021. "Stock-selection timing," Journal of Banking & Finance, Elsevier, vol. 125(C).
    8. Scott Bennett & David R. Gallagher & Graham Harman & Geoffrey J. Warren & Yuki Xi, 2018. "A new perspective on performance persistence: evidence using portfolio holdings," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 58(1), pages 91-125, March.
    9. Ying-Fen Fu, 2014. "Individual Fund Manager Sentiment, Fund Performance and Performance Persistence," International Journal of Economics and Financial Issues, Econjournals, vol. 4(4), pages 870-885.
    10. Huij, Joop & Derwall, Jeroen, 2008. ""Hot Hands" in bond funds," Journal of Banking & Finance, Elsevier, vol. 32(4), pages 559-572, April.
    11. Berkowitz, Jason P. & Schorno, Patrick J. & Shapiro, Dmitry A., 2017. "Characteristics of mutual funds with extreme performance," Review of Financial Economics, Elsevier, vol. 34(C), pages 50-60.
    12. Huij, Joop & Verbeek, Marno, 2007. "Cross-sectional learning and short-run persistence in mutual fund performance," Journal of Banking & Finance, Elsevier, vol. 31(3), pages 973-997, March.
    13. Dimitrios Koutmos & Bochen Wu & Qi Zhang, 2020. "In search of winning mutual funds in the Chinese stock market," Review of Quantitative Finance and Accounting, Springer, vol. 54(2), pages 589-616, February.
    14. Dahm, Laura K. & Sorhage, Christoph, 2015. "Milk or wine: Mutual funds' (dis)economies of life," CFR Working Papers 15-05, University of Cologne, Centre for Financial Research (CFR).
    15. Joop Huij & Marno Verbeek, 2009. "On the Use of Multifactor Models to Evaluate Mutual Fund Performance," Financial Management, Financial Management Association International, vol. 38(1), pages 75-102, March.
    16. Andrea Flori & Fabrizio Lillo & Fabio Pammolli & Alessandro Spelta, 2021. "Better to stay apart: asset commonality, bipartite network centrality, and investment strategies," Annals of Operations Research, Springer, vol. 299(1), pages 177-213, April.
    17. Pedraza, Alvaro & Pulga, Fredy & Vasquez, Jose, 2020. "Costly index investing in foreign markets," Journal of Financial Markets, Elsevier, vol. 51(C).
    18. Clemens Sialm & Hanjiang Zhang, 2020. "Tax‐Efficient Asset Management: Evidence from Equity Mutual Funds," Journal of Finance, American Finance Association, vol. 75(2), pages 735-777, April.
    19. Ľuboš Pástor & Robert F. Stambaugh & Lucian A. Taylor, 2017. "Do Funds Make More When They Trade More?," Journal of Finance, American Finance Association, vol. 72(4), pages 1483-1528, August.
    20. Huij, Joop & Post, Thierry, 2011. "On the performance of emerging market equity mutual funds," Emerging Markets Review, Elsevier, vol. 12(3), pages 238-249, September.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:jfnres:v:33:y:2010:i:3:p:249-265. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: https://edirc.repec.org/data/sfaaaea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.