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Towards a Holistic Approach for Mutual Fund Performance Appraisal

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Abstract

There is a growing literature that employs nonparametric frontier methods in order to evaluate the performance of investment funds. This paper proposes an integrated approach for analyzing the efficiency and performance of mutual funds. The methodology combines data envelopment analysis (DEA) with a multicriteria decision aid methodology. DEA is employed to assess the relative efficiency of mutual funds in terms of their return, capital flow, gross expense ratio, turnover rate, and risk. In a second stage, a multicriteria approach is employed to develop an overall performance measure on the basis of the DEA efficiency results. The resulting model evaluates all mutual funds in a common basis and enables comparisons over time. The methodology is applied to a sample of more than 500 US equity mutual funds over the period 2003–2010. The analysis is implemented under three different time-window periods (one, three, and five year evaluations). The results obtained for portfolios constructed on the basis of our global performance measure, Sharpe ratio and Morningstar rating system are useful since they provide significant economic evidence in favor of our global performance measure. Our results entail practical implications for both investors and fund managers in terms of fund selection and efficient portfolio management respectively.

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Authors and Affiliations

  1. Department of Accounting & Finance, Technological Educational Institute of Peloponnese, Kalamata, Greece

    Vassilios Babalos

  2. Financial Engineering Laboratory, School of Production Engineering and Management, Technical University of Crete, University Campus, 73100 , Chania, Greece

    Michael Doumpos & Constantin Zopounidis

  3. Audencia Nantes School of Management, Nantes Cedex, France

    Constantin Zopounidis

  4. Department of Business Administration, University of Piraeus, 80, Karaoli and Dimitriou Str, Piraeus, Greece

    Nikolaos Philippas

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  1. Vassilios Babalos
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  2. Michael Doumpos
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  3. Nikolaos Philippas
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  4. Constantin Zopounidis
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Correspondence to Constantin Zopounidis.

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Babalos, V., Doumpos, M., Philippas, N. et al. Towards a Holistic Approach for Mutual Fund Performance Appraisal. Comput Econ 46, 35–53 (2015). https://doi.org/10.1007/s10614-014-9450-y

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