Rating Mutual Funds Through an Integrated DEA-Based Multicriteria Performance Model: Design and Information Content

Abstract

There is a growing literature that employs nonparametric frontier methods in order to evaluate the performance of investment funds. This paper proposes an integrated approach for analyzing the efficiency and performance of mutual funds. The methodology combines data envelopment analysis (DEA) with a multicriteria decision aid (MCDA) methodology. DEA is employed to assess the relative efficiency of mutual funds in terms of their return, size, gross expense ratio, turnover rate, and risk. In a second stage, a multicriteria approach is employed to develop an overall performance measure on the basis of the DEA efficiency results. The resulting model evaluates all mutual funds in a common basis and enables comparisons over time. The methodology is applied on a large sample of more than 500 US mutual funds over the period 2003-2010. The analysis is implemented under three different time-window periods (one, three, and five year evaluations) and the results are compared against the fund ratings provided by Morningstar.