Journal of Asset Management

, Volume 10, Issue 3, pp 158–169

Predicting returns of equity mutual funds

  • Olaf Stotz
Original Article

DOI: 10.1057/jam.2009.7

Cite this article as:
Stotz, O. J Asset Manag (2009) 10: 158. doi:10.1057/jam.2009.7
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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.

Keywords

out-of-sample return forecastingmutual fundsmultifactor modelnaïve investor

Copyright information

© Palgrave Macmillan 2009

Authors and Affiliations

  • Olaf Stotz
    • 1
  1. 1.Frankfurt School of Finance & Management, Sonnemannstraße 9-11FrankfurtGermany