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Journal of Asset Management

, Volume 20, Issue 1, pp 15–30 | Cite as

Benchmark-adjusted performance of US equity mutual funds and the issue of prospectus benchmarks

  • Irina Bezhentseva Mateus
  • Cesario Mateus
  • Natasa TodorovicEmail author
Original Article

Abstract

This study examines the impact of mismatch between prospectus benchmark and fund objectives on benchmark-adjusted fund performance and ranking in a sample of 1281 US equity mutual funds. All funds in our sample report S&P500 index as a prospectus benchmark, yet 2/3 of those are placed in the Morningstar category with risk and objectives different to those of the S&P500 index. We identify more appropriate ‘category benchmarks’ for those mismatched funds and obtain their benchmark-adjusted alphas using recent Angelidis et al. (J Bank Finance 37(5):1759–1776, 2013) methodology. We find that S&P500-adjusted alphas are higher than ‘category benchmark’-adjusted alphas in 61.2% of the cases. In terms of fund quartile rankings, 30% of winner funds lose that status when the prospectus benchmark is substituted with the one better matching their objectives. In the remaining performance quartiles, there is no clear advantage of using S&P 500 as a benchmark. Hence, the prospectus benchmark can mislead investors about fund’s relative performance and ranking, so any reference to performance in a fund’s prospectus should be treated with caution.

Keywords

Prospectus benchmark selection Mutual fund benchmark mismatch Benchmark-adjusted alphas Performance ranking 

JEL Classification

G11 G12 G23 

Notes

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Copyright information

© Springer Nature Limited 2019

Authors and Affiliations

  1. 1.Cass Business School, CityUniversity of LondonLondonUK

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