Abstract
The primary aim of this study is to investigate whether equity fund managers are selecting appropriate self-nominated benchmark indexes for their funds. Specifically, we examine the performance of active Australian equity mutual funds and whether they demonstrate similar return performance and risk characteristics to their nominated benchmark indexes (for example, ASX 200 or ASX 300) from 2008 to 2012. Our findings suggest that active Australian equity fund managers do not outperform their self-specified capitalization indexes after risk and management fees and transaction costs. Further, managers appear to select stocks that are representative of investment characteristics associated with broad-based capitalization indexes. We also find that the ASX 200, ASX 300 and a range of alternative Australian capitalization indexes are highly positively correlated and demonstrate similar risk-return attributes. If fund managers cannot consistently match or better the performance of their nominated benchmark indexes after risk and transaction costs, then investors may be better off investing in low-cost index exchange-traded funds or equivalent investment vehicles.
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Notes
A benchmark index should be clearly stated in the fund’s product disclosure statement/prospectus.
Fund selection is based on an 80 per cent equity allocation or greater and operating as of December 2012.
Griffin (2002) suggests that local factors outperform global and regional factors in explaining stock returns. Also, we reproduced descriptive statistics (untabulated) for the risk factors and find that the RMRF, SMB and HML values are virtually equivalent to the values reported by Brailsford et al (2012). In addition, when comparing the factors with the Asian-Pacific risk factors identified by Fama and French (2012) over the time period specified in this study, we observe no statistically significant differences in the average risk premia for each of the reported risk factors (that is, RMRF, SMB, HML and WML).
For more detailed information about the Australian Carhart factors, see www.business.unsw.edu.au/About-Site/Schools-Site/Economics-Site/Documents/Matthew_Martineer.pdf.
For more detailed information about the Asian-Pacific Carhart factors, see mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html.
The Asian-Pacific Carhart factors yield an RMRF of 0.5155 for the ASX 200 index. This is significantly lower than what has been reported in US studies (Costa and Jakob, 2006, 2010; Costa et al, 2011). This could perhaps be explained by the regional constituents and weightings, which make-up the Asian-Pacific market; thus, resulting in lower explanatory power for anticipating returns in the Australian market. Full Asian-Pacific Carhart factor results are available from the authors upon request.
The Australian Carhart factors are based on approximately 2300 companies, representing 96 per cent of the entire Australian market capitalization. Given that the ASX 200 represents 80 per cent of the market, this could perhaps explain why RMRF is not closer to 1.
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Acknowledgements
Our article employs some literature and methods found in Costa and Jakob (2011). We acknowledge any overlap or similarity with this article. This research was funded by an internal grant from the Southern Cross Business School, Australia. Dr Keith Jakob would like to thank the Byrnes Family for their continued support of the Donald and Carol Jean Byrnes Professorship. We would also like to thank Prof. Kenneth French, Mr Mathew Martineer, Prof. Richard Holden (UNSW) and SIRCA for their assistance with data used in this article.
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Costa, B., Jakob, K., Niblock, S. et al. ‘Benchmarking’ the benchmarks: How do risk-adjusted returns of Australian mutual funds and indexes measure up?. J Asset Manag 16, 386–400 (2015). https://doi.org/10.1057/jam.2015.29
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DOI: https://doi.org/10.1057/jam.2015.29