Investment choice and performance potential in the mutual fund industry

Abstract

This article investigates the performance potential of a set of three investment choices: multi-asset, multi-management and multi-instrument. These approaches have been used recently in the asset management industry to give investors access to an extended investment universe, and to provide higher risk-adjusted returns to clients. In this context, we evaluate each investment choice's overall contribution to portfolio performance. Using bootstrapping simulations and a set of performance measures over a 20-year sample, we show that (1) extending the typical equity- and bond-focused fund to a set of five asset classes increases the Sharpe ratio by 50 per cent on average; (2) allowing for third-party funds in a client's portfolio significantly reduces company-specific risk; and (3) including single assets leads to an increased return potential for skilled portfolio managers. Thus, our empirical results suggest that investments in actively managed mutual funds are likely to benefit significantly from these multi-investment approaches, and that the current practice of providing investors with balanced in-house funds is suboptimal.