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An examination of ex ante fund performance: identifying indicators of future performance

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Abstract

Although there has been a substantial flow of money over the last 20 years into indexed funds and ETFs, the vast majority of equity investment in mutual funds is still being managed on a discretionary basis. In this paper, we investigate whether there exist variables that might be able to give an indication of future superior or inferior benchmark-adjusted active performance. Our results suggest that investors should avoid investing in, or should disinvest from funds that: produce a bottom decile information ratio; produce top decile levels of turnover; experience top decile levels of net inflows; and have top decile levels of fees. We conclude our paper with a suggestion as to how this information might help investors make more informed fund choices.

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Notes

  1. See: https://www.iciglobal.org/pdf/2018_factbook.pdf.

  2. Cuthbertson et al. (2010) use this distinction in their thorough survey of the mutual fund performance evaluation literature.

  3. In unreported research we also calculated averages of these indicators over year t − 2, t − 1 and t to see whether there was any useful longer-term information in them. However these results, that are available on request, did not yield any useful, ex ante performance information.

  4. http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html.

  5. The Key Investor Information Document (KIID) is a document that provides key information about investment funds, in order to help a potential investor compare different investment funds and assess which fund meets their specific needs.

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Authors and Affiliations

  1. Centre for Asset Management Research, Faculty of Finance, The Sir John Cass Business School, City University of London, London, UK

    Andrew Clare

  2. Department of Mathematics, Imperial College, London, UK

    Mariana Clare

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  1. Andrew Clare
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  2. Mariana Clare
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Correspondence to Andrew Clare.

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Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

This paper has benefited greatly from the help and advice of Guendalina Bolis and Alberto Garcia Cabo from Inversis Banco and from discussions with members of the Inversis International Advisory Group for fund Selection. However, all opinions expressed in this paper are those of the authors.

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Clare, A., Clare, M. An examination of ex ante fund performance: identifying indicators of future performance. J Asset Manag 20, 175–195 (2019). https://doi.org/10.1057/s41260-019-00118-4

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