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Abstract
In this paper we analyse the implications of using conditioning information variables on mutual fund performance and on the persistence of that performance. Applied to a sample of Portuguese stock funds, conditional performance evaluation that takes into account public information variables such as interest rates, dividend yield and term spread eliminates the evidence of superior performance. However, in relation to the persistence of performance, the results do not change. Although the case for persistence is not evident, individual fund managers exhibit characteristics of superior persistent or inferior persistent performance over both short and long intervals. The incorporation of public information variables is an important contribution to the process of evaluating fund performance. Time-varying betas might allow for a better assessment of performance.
Introduction
THE PERFORMANCE EVALUATION of investment portfolios has been widely debated in the financial literature, and is still an evolving subject. Only through measures of performance may investors and portfolio managers know if the type of information used resulted in abnormal returns. Furthermore, the issue of assessing whether fund managers add value is a challenging one, since it is closely related to questions (not easily answered) about market efficiency and information dissemination in capital markets.
The traditional approaches to measure performance are unconditional in the sense that it is assumed that no information about the state of the economy is used to form returns expectations. So, expected returns and risk are assumed to be constant over time. It is well recognized that traditional measures are biased when portfolio managers use dynamic strategies resulting in time-varying risk (Jensen [1972], Dybvig and Ross [1985], Admati and Ross [1985] and Grinblatt and Titman [1989]). Several studies have shown that predetermined information variables are useful in predicting stock and bond returns (among others, Keim and Stambaugh [1986], Fama and French [1989], Pesaran and Timmermann [1995]). This evidence resulted in important developments on asset pricing models (Ferson and Korajczyk [1995], Jagannathan and Wang [1996] and Ferson and Harvey [1999]) but, with few exceptions, little has been explored at the level of portfolio performance evaluation.
In this context, the conditional performance evaluation approach considers the public information that is available to investors at the moment the returns...