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MUTUAL FUNDS SELECTION BASED ON FUNDS CHARACTERISTICS
Author(s) -
Budiono Diana P.,
Martens Martin
Publication year - 2010
Publication title -
journal of financial research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.319
H-Index - 49
eISSN - 1475-6803
pISSN - 0270-2592
DOI - 10.1111/j.1475-6803.2010.01270.x
Subject(s) - closed end fund , fund of funds , mutual fund , business , open end fund , target date fund , manager of managers fund , selection (genetic algorithm) , income fund , stable value fund , finance , passive management , investment (military) , investment strategy , fund administration , institutional investor , computer science , corporate governance , artificial intelligence , politics , market liquidity , political science , law
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.