Mutual Fund Returns and Their Characteristics: A Novel Approach to Picking Better Performing Actively Managed Funds

Abstract

Using a survivorship bias-free dataset set of over 4,300 U.S. equity and international equity funds for the period 2000-2018, we examine whether funds chosen based on various fund characteristics in a given year can yield superior performance the following year. We find that a portfolio of funds chosen based on the combination of characteristics of lowest expense ratio, and lowest turnover and highest Sharpe ratio, generates considerably better future performance than the average actively managed fund and the difference in returns is statistically significant. Interestingly, we are unable to confirm the conventional wisdom that the size of a fund or past recent fund cashflows are important drags on portfolio performance.