Abstract
We evaluate the efficiency of mutual fund managers of 20 different classes of management styles to identify the most efficient strategies and to propose an optimal pattern in selecting the funds by investors. We collect monthly data of 17,686 US mutual funds for a five-year period 2005–2010 to minimize the impact of survivorship bias and use Data Envelopment Analysis (DEA) model to evaluate the mutual fund performance. The set of considered inputs comprised “variance”, representing the mutual fund risk, and “turnover, expense ratio and loads indicators”, reflecting the mutual fund costs and fees. Two kinds of outputs are taken into account by our DEA model, “portfolio return” and “stochastic dominance indicators”. As a unique contribution, we state the benefits of the DEA approach in the DARA, CARA, and IARA framework, and evaluate the efficiency of mutual funds based on fund strategies as well as the performance of best mutual funds among their group. The evidence shows that the efficiency scores of technical, management, and scale are respectively 0.81, 0.921, and 0.874 for the DARA model, while the efficiency scores of two models of CARA and IARA are negligible. Also, we rank each management strategy in any model based on two methods – the number of referencing and the weighted value so that the managers of inefficient strategies must pattern the managers’ ability of reference (efficient) strategies to improve their efficiency on the fund market in future.
Highlights
Mutual fund performance can be evaluated by either the parametric approach or nonparametric approach
We propose three models of Data Envelopment Analysis (DEA) in the Decreasing Absolute Risk Aversion (DARA), Constant Absolute Risk Aversion (CARA), and Increasing Absolute Risk Aversion (IARA) framework to identify the best model in evaluating the efficiency of fund managers
We propose a replacement approach to evaluate the performance of mutual fund managers
Summary
Mutual fund performance can be evaluated by either the parametric approach or nonparametric approach. Earlier studies of fund performance evaluation are started with the models based on Jensen’s alpha (i.e., Jensen 1968), and are extended by adding more variables as explanatory factors (i.e., Carhart 1997) to improve the models. Most models are grounded on parametric models, in which they require a strong theoretical model and a benchmark to compute the outcome They only evaluate the funds performance in terms of the relationship between risk premium and return, without realizing the amount of resources that has been spent. Due to the fact that researchers are trying to propose a top model for the comprehensive evaluation of the performance of funds, they have extended the models in the framework of two parametric (i.e., Carhart 1997) and non-parametric approaches
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