Stochastic Dominance and the Performance of U. K. Unit Trusts

Abstract

There have been a large number of tests assessing the performance of U.S. mutual funds. Most of the performance measures have been either explicitly or implicitly based on only two moments of the distribution of returns: the mean and variance. For example, the performance measure suggested and employed by Sharpe [10] is the fund'sex-post reward (return) to variability ratio, while the capital asset pricing measures employed by Treynor [11], Jensen [4] and others relate the fund's returns to those expected, given its level of systema? tic risk ($) . risk ($) and excess return (a) measures themselves are directly derived from an underlying mean-variance model of asset choice. When these performance measures are used to compare fund performance vis a vis the market (index), no consensus of opinion appears to have materialized, although most studies find that funds in general perform worse than the market. Indeed, as Carlson ([2, p. 22]) notes in the conclusion of an article reviewing a num? ber of U.S. mutual fund studies, The issue of whether mutual funds outperform 'the market' depends in large degree on the selection of both the time period and market proxy. Analagous results have been found in studies analyzing the performance of British mutual funds (unit trusts). Employing performance measures similar to those mentioned above, the major studies published so far have found trusts to have performed extremely poorly. Moreover, the results imply that the rela? tive performance of unit trusts as a group are far worse than U.S. mutual funds. first mean-variance test of U.K. unit trust performance was conducted by Briscoe, Samuels and Smythe [1]. Employing annual data on the returns of 14 unit trusts over the period 1953-63, their objective was to compare the trusts return-risk performance with those of U.S. mutual funds, with the standard of comparison being the results presented by Sharpe [10] for 34 funds over the same period. Their main findings were that whereas the average returns for mutual