What Factors Work in Selecting Funds? Evidence from the European Offshore Market
43 Pages Posted: 4 Feb 2009
Date Written: February 3, 2009
Abstract
While published literature has largely concentrated on the performance persistence phenomenon, research is sparse in regards to the determinants of investment performance. In this paper, Standard & Poor's makes a strong effort to establish robust results by comparing the performance of different fund portfolios formed based upon qualitative and quantitative fund factors, and providing an economically meaningful measure of the magnitude of the relation between performance and attributes. On the qualitative factors side, for developed equities and bonds funds, larger funds tend to outperform smaller funds as economies of scale dominates market liquidity. Funds with lower expense ratios tend to provide better risk-adjusted performance compared to their higher expense counterparts. On the quantitative factors side, Jensen alpha and information ratio tend to do the best job in predicting future fund performance. Superior performance is a short-lived phenomenon that is observable only when funds are selected and sampled frequently. Therefore, fund selection framework should focus more on finding an appropriate mix of factors that successfully predict fund outperformance over shorter time periods, rather than focus on finding fund managers that consistently outperform over longer time periods.
Keywords: fund selection, quantitative, qualitative, performance
JEL Classification: C15
Suggested Citation: Suggested Citation
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