Content area
Full text
Investors can choose from over 10,000 mutual funds. When they try to examine the risk of a fund, however, all too often the risk is stated in terms of the classification of the fund (e.g., aggressive growth, growth, income, balanced, or international). Thus, investors must select appropriate investment vehicles in terms of a subset of funds.
Many financial publications list performance rankings by such mutual fund classification. DiBartolomeo and Witkowski [1997] note that a large proportion of mutual funds are misclassifled, rendering performance comparisons inadequate. Most publications do not consider a more appropriate means of comparison either, such as reward-to-risk performance measures.
There is some conventional wisdom suggesting investors should rely on management tenure as a criterion for mutual fund selection. Because of greater experience, longer-tenure managers should presumably be able to produce superior returns to other managers. While the research on performance of managers has been inconclusive, much of it has also focused on total returns as the measurement variable.
Our research provides further information on the value of management tenure in creating excess returns by including a measure of risk-adjusted return as a return variable. We use a data set of returns over 1992-2001, which included an unprecedented boom in common equity prices as well as bear markets in 2000 and 2001.
LITERATURE REVIEW
Several studies examine mutual fund returns. Wermers and Moskowitz [2000] examines the performance of aggressive growth, growth, growth and income, and balanced funds. He finds that lower net return achieved by mutual funds is caused by non-stock holdings of the funds, expenses, and transaction costs. Blake and Morey (2000] find that funds rated in the lowest category by Morningstar generally do have relatively poor future performance, but funds rated in the highest category do not outperform funds in the next-to-highest or median categories.
Rao [2001] examines the impact of distribution fees. On a cross-section of 1986 mutual funds, he finds that fees do not offer economic value to shareholders but do increase a fund's expense ratio.
Mutual fund managers sometimes misclassify their investment strategy in order to show more competitive results. DiBartolomeo and Witkowski [1997] find that 40% of mutual funds are misclassified, and 9% seriously so. They cite ambiguity of classification systems and competitive pressures as the...