Rankings for Australian managed funds: Contrariness and performance index failure

Abstract

This paper examines the persistence of return performance for Australian managed funds. Our first finding is that return performance is unstable, with a strong tendency for top-performing funds to become bottom-performing funds, and vice versa. Our second finding is that the classical measures of fund performance (Sharpe and Treynor indices) provide a more stable measure of performance, but, significantly, that such stability results from the inherent insensitivity of the performance measures to either improvements or deteriorations in a fund's return performance. We thereby are led to question the insightfulness of these standard performance indices. In seeking to clarify these issues, we apply both a Spearman rank correlation and an innovative Bayesian approach in rating Australian funds over the period between 1998 and 2004.