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Benchmark Discrepancies and Mutual Fund Performance Evaluation

Published online by Cambridge University Press:  05 February 2021

K. J. Martijn Cremers ,
Jon A. Fulkerson  and
Timothy B. Riley Open the ORCID record for Timothy B. Riley [Opens in a new window]
K. J. Martijn Cremers
Affiliation:
University of Notre Dame Mendoza College of [email protected]
Jon A. Fulkerson
Affiliation:
University of Dayton School of Business [email protected]
Timothy B. Riley*
Affiliation:
University of Arkansas Walton College of Business
*
[email protected] (corresponding author)
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Abstract

We introduce a new holdings-based procedure to identify whether a mutual fund has a benchmark discrepancy, which we define as a benchmark other than the prospectus benchmark best matching a fund’s investment strategy. We find that funds with a benchmark discrepancy tend to be riskier than their prospectus benchmarks indicate. As a result, the funds on average outperform their prospectus benchmarks, before further risk adjustments, despite underperforming the benchmarks that best match their portfolios.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 57 , Issue 2 , March 2022 , pp. 543 - 571
Copyright
© The Author(s), 2021. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

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Footnotes

We thank an anonymous referee, Chris Clifford, Jennifer Conrad (the editor), Brigitte Dooley, Brad Jordan, Yuekun Liu, Berk Sensoy, Sara Shirley, Jeff Stark, Russ Wermers, Qing Yan, seminar participants at the University of Dayton, members of the Chartered Financial Analyst (CFA) Society Arkansas, and participants at the 2018 Financial Management Association Annual Meeting (especially discussant Andrei Simonov), 2019 Southwest Finance Symposium (especially discussant Yifan Liu), 2019 Eastern Finance Association Annual Meeting (especially discussant Fan Chen), and 2019 Financial Management Association European Conference (especially discussant Javier Estrada) for their helpful comments and suggestions. All errors are our own. Disclosure: Cremers is currently an independent director at Ariel Investments and a consultant to Touchstone Investments and State Street Associates, and Fulkerson and Riley have both been previously compensated by Natixis Investment Managers and the Investment Adviser Association.

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