Measuring Mutual Fund Performance with Characteristic-Based Benchmarks






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    • Daniel is from Northwestern University, Grinblatt is from the University of California Los Angeles, Titman is from the University of Texas at Austin, and Wermers is from the University of Colorado at Boulder. We thank Josef Lakonishok, Neil Pearson (the discussant), and participants of the “Performance and Behavior of Money Managers” session of the 1997 AFA meetings in New Orleans, Louisiana. We also thank Mark Carhart for providing data used in one section of this article, the Price Center for Entrepreneurial Studies, and The UCLA Academic Senate for providing funding, and Eduardo Schwartz for assistance in obtaining funding.


This article develops and applies new measures of portfolio performance which use benchmarks based on the characteristics of stocks held by the portfolios that are evaluated. Specifically, the benchmarks are constructed from the returns of 125 passive portfolios that are matched with stocks held in the evaluated portfolio on the basis of the market capitalization, book-to-market, and prior-year return characteristics of those stocks. Based on these benchmarks, “Characteristic Timing” and “Characteristic Selectivity” measures are developed that detect, respectively, whether portfolio managers successfully time their portfolio weightings on these characteristics and whether managers can select stocks that outperform the average stock having the same characteristics. We apply these measures to a new database of mutual fund holdings covering over 2500 equity funds from 1975 to 1994. Our results show that mutual funds, particularly aggressive-growth funds, exhibit some selectivity ability, but that funds exhibit no characteristic timing ability.