Finance Portfolio Management Report: Mutual Fund Evaluation

This report analyzes mutual fund performance by utilizing characteristic-based benchmarks, focusing on equity funds from 1975 to 1994. It evaluates the performance of portfolios based on stock characteristics, including market capitalization, book-to-market ratio, and prior-year returns. The research employs various methodologies, such as Characteristic-Based Performance Measures, CS Measure, CT Measure, AS Measure, GT Measure of Performance, and the Carhart Measure, to assess the return generation capabilities of mutual funds. The findings indicate that aggressive growth funds exhibit some selectivity ability, but there is no evidence of characteristic timing ability. The report also highlights the implications for investors in identifying and measuring mutual funds' performance to generate higher returns. The analysis suggests that while fund managers may change investment styles to increase returns, this can reduce the performance of mutual fund managers. The report concludes that the selective measures assigned for investment purposes have no significant abnormal performance and would not provide higher returns to the investors in the mechanical characteristic-based strategy.

Running head: FINANCE PORTFOLIO MANAGEMENT
Finance Portfolio Management
Name of the Student:
Name of the University:
Authors Note:

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Table of Contents
1. Summary of the paper:...........................................................................................................2
2. Research hypothesis or research purpose:..............................................................................2
3. Data and methodology:..........................................................................................................3
4. Study or test results:...............................................................................................................4
5. Implications of the paper:.......................................................................................................5
Bibliography:..............................................................................................................................6

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1. Summary of the paper:
The research paper aims in identifying and measuring the mutual fund performance
with characteristic benchmarks. The article directly evaluates the performance of the portfolio
is based on the Benchmarks on the characteristics of the stocks held. The article has directly
evaluated 2500 equity funds from 1975 to 1994 understanding the measures of the new
database on the mutual fund Holdings. The results of the overall article directly pottery that
aggressive Growth Fund exhibit some selective ability, which does not exhibit any
characteristic timing ability. The further analysis has indicated that the characteristic based
benchmark conducted on the article is directly designed for detecting the measures that are
taken by the mutual funds for picking the relevant stocks.
Therefore, the results obtained in the article has directly indicated about the abnormal
performance of the portfolio managers who change their investment style over time
adequately increasing the level of expected returns from their investment. However, the
results directly indicate the abnormal performance of the style that has been used under time
measure, where no successful evidence has been identified regarding the style timers. Thus, it
is identified that average abnormal performance is relatively small and can be identified by
examining the past performance, which is inductive of future performance of a fund.
2. Research hypothesis or research purpose:
There are two hypotheses that are conducted in the article where one is that the
financial market became more efficient overtime par had given by the expansion in
professional managed money. The second hypothesis in the article is the expansion diluted
the performance of good mutual fund managers because the proportion of such managers
decreases appreciable over time relative to the total number of managers. Both the hypothesis

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indicated in the article directly helps in identifying the performance of the mutual funds in
accordance with the fund managers that are associated with them.
Therefore, it could be understood that the research paper directly evaluates the
empirical evidence regarding the characteristics, which help in detecting the overall
components of the managed funds. The major components that are used for analyzing the
return generation capability of the fund are Average Style (AS), Characteristics Selectivity
(CS), and Characteristics Timing (CT).This measure would eventually help in analyzing the
hypothetical returns of a fund and determined the more accurate way in detecting the return
generation capability of the funds. The calculations regarding the characteristic based
measures are straightforward, which directly helps in detecting the level of Return generation
capability of the funds.
3. Data and methodology:
The quarterly equity Holdings of all equity Mutual Funds between 1974 to 1995 is
directly used in the overall article for identifying the relevant results. The article utilizes a
database of 5000 funds, where sector funds bonds, preferred funds, and any other funds over
the investment objectives were excluded. The data that is used for analyzing the overall
Mutual Funds us directly segregated under five subgroups such as all funds, aggressive
growth, growth, growth & income, and balanced or income. The further data has been
segregated under average sight quintal, average book to market quintal, and average
Momentum quintal for identifying the relevant return generation capability of the mutual
funds.
The article utilizes the methodology of Characteristic-Based Performance Measures,
CS Measure, CT Measure, AS Measure, GT Measure of Performance, Carhart Measure,
CAPM-Based (One-Factor) Jensen Measure, and Carhart-Adjusted GT and CS Measures for

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analyzing the data that has been collected from the mutual funds. The performance evaluation
methodology that is used in the article or directly includes the characteristic based approach,
which uses benchmark portfolios held by mutual funds. Moreover, the article also uses GT
measure, which directly uses the past portfolio weights of a fund as a benchmark for
analyzing the returns. Furthermore, the tension measure using the four-factor portfolio is also
used as a benchmark for evaluation. Lastly, the tension measure using the CRSP the value
method index as a benchmark is used for analyzing the performance of the mutual funds.
Calculation Formula
The CS Measure
The CT Measure
The AS Measure
The GT Measure of
Performance
The Carhart Measure
The above table provides information about the calculation that has been taken into
consideration of or competing the research paper.
4. Study or test results:
The result obtained from the article is mainly based on Mutual Fund Performance
From 1975 to 1994, A Closer Look at the Measures of Performance, Persistence of Mutual
Fund Performance, and Performance Attribution Analysis. The results obtained from

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the article directly indicate about the performance attribution that has been analyzed for the
data collected from mutual fund Returns. The analysis has directly indicated that the chance
of average mutual fund beats a mechanical strategy is fairly small, as the overall returns is
approximately equal to the management fees. However, under the agriculture growth and
Growth Fund it is directly indicated that high performance is generated by larger costs, which
directly supports the overall evidence regarding the consistency with equilibrium in the
returns provided by mutual funds. The results obtained from the article directly indicate that
there is no evidence that funds are successful style timers, whereas only some of the investors
showed abnormal performance with the style timing measure. Therefore, it is understood that
average abnormal performance is relatively slow where some portfolio performs really well,
while the majority of the analysis indicate low performance of mutual funds.
5. Implications of the paper:
The major implications of the paper is for identifying and measuring the mutual
funds’ performance with Benchmarks which helps in understanding the level of turns that can
be generated by the managers of the fund. This article would eventually help the investor to
identify whether it was in the mutual fund is an appropriate measure that allows them to
generate higher returns in the long run. More the analysis also indicates that fund manager
tends to change their overall investment style 2 to increase the level of expected returns that
can be generated from the relevant Investments. This change in in investment style has
directly reduced the capability of the cam mutual fund managers to generate higher level of
Returns in the investment process. The selective measure assigned for investment purposes
has no significant abnormal performance, where investments would not provide higher
returns to the investors in the mechanical characteristic based strategy.

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Bibliography:
Daniel, Kent, Mark Grinblatt, Sheridan Titman, and Russ Wermers. "Measuring mutual fund
performance with characteristic‐based benchmarks." The Journal of finance 52, no. 3 (1997):
1035-1058.