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- Title
AN ASSESSMENT OF THE PERFORMANCE OF MUTUAL FUND MANAGEMENT: 1969-1975.
- Authors
Tye Kim
- Abstract
The objective of this study was to evaluate the investment performance of mutual fund for the seven-year period 1969-1975, using the return performance of three-index benchmark portfolios (a form of weighted index benchmark portfolios) as the standard. The benchmark portfolios were generated on the premise that as a first-level decision (or policy) mutual fund managements tend to allocate their total funds into three mutually exclusive market segments before making additional investment decisions to map an expected risk-return combination for an investment time horizon. Given this premise, the purpose of the additional investment decisions and related costs should be to build portfolios whose returns per unit risk are at least as large as the returns per unit risk from the benchmark portfolios. Judged by the benchmark standards, 138 mutual funds performed rather poorly. If zero costs were assumed for generation of the standards, virtually all mutual funds were outperformed by their benchmark portfolios. When a liberal cost allowance was made for the diversification services offered by the mutual funds, on the basis of the return per unit risk, about 90 percent of the mutual funds were outpaced by their benchmark portfolios. Big losers turned out to be the funds that assumed high level of risk. The poor performance of the mutual funds was also confirmed by the differential returns of the mutual funds (See Graph 1) and by the standard of mean return. Thus, based on the sample evidence, it may be concluded that during the seven-year period 1969-1975, most of the mutual funds, especially those funds with high risk objectives, were engaged in losing games. The strong, positive risk-return relationship that prevailed in 1950s and 1960s may have misled many fund managers to anticipate similar risk-return relationships in the first half of the 1970s and to choose risky common stocks. When the highly speculative expectation had failed to materialize in those years with collapse in the prices of many so-called growth stocks, naturally those misled funds may have experienced heavy losses. In view of the fact that most of the sample funds were outperformed by the benchmark portfolios, the investment experience of the seven-year period is consistent with the efficient market hypothesis, as many previous studies of mutual funds were. It appears, however, that the latest performance record of mutual funds was unprecedently poor. It may reflect, in part, the futile, costly efforts made by mutual funds to outperform the markets in the unusually volatile security markets we have lately experienced.
- Subjects
MUTUAL funds; INVESTMENT analysis; PORTFOLIO performance; PERFORMANCE evaluation; ECONOMIC history -- 1945-1971; EFFICIENT market theory
- Publication
Journal of Financial & Quantitative Analysis, 1978, Vol 13, Issue 3, p385
- ISSN
0022-1090
- Publication type
Article
- DOI
10.2307/2330148