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Predicting returns of equity mutual funds

Author

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  • Olaf Stotz

    (Frankfurt School of Finance & Management, Sonnemannstraße 9-11)

Abstract

This paper investigates 1-year-ahead forecasts of actively managed equity mutual funds. A multifactor forecast model is developed that employs forecasts on the manager's skill, the fund's style and the expected factor returns. On the basis of a sample of German equity funds, we show that this forecast model substantially improves forecast power in relation to a naïve forecast model, which just extrapolates past returns into the future. In particular, the multifactor model reduces the mean-squared error (mean absolute error) by up to 30 per cent compared to the naïve model. More importantly, from the perspective of a mutual fund investor, the return of top-decile funds chosen by the multifactor model exceeds the average return of all funds by more than 200 basis points per year.

Suggested Citation

  • Olaf Stotz, 2009. "Predicting returns of equity mutual funds," Journal of Asset Management, Palgrave Macmillan, vol. 10(3), pages 158-169, August.
    • Handle: RePEc:pal:assmgt:v:10:y:2009:i:3:d:10.1057_jam.2009.7
    DOI: 10.1057/jam.2009.7
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