‘Benchmarking’ the benchmarks: How do risk-adjusted returns of Australian mutual funds and indexes measure up?

Abstract

The primary aim of this study is to investigate whether equity fund managers are selecting appropriate self-nominated benchmark indexes for their funds. Specifically, we examine the performance of active Australian equity mutual funds and whether they demonstrate similar return performance and risk characteristics to their nominated benchmark indexes (for example, ASX 200 or ASX 300) from 2008 to 2012. Our findings suggest that active Australian equity fund managers do not outperform their self-specified capitalization indexes after risk and management fees and transaction costs. Further, managers appear to select stocks that are representative of investment characteristics associated with broad-based capitalization indexes. We also find that the ASX 200, ASX 300 and a range of alternative Australian capitalization indexes are highly positively correlated and demonstrate similar risk-return attributes. If fund managers cannot consistently match or better the performance of their nominated benchmark indexes after risk and transaction costs, then investors may be better off investing in low-cost index exchange-traded funds or equivalent investment vehicles.