Mutual Fund Returns and Their Characteristics: A Simple Approach to Selecting Better Performing Actively-Managed Funds

Abstract

Using a survivorship bias-free dataset set of over 4,300 actively-managed US equity and international equity funds for the period 2000–2018, the authors examine whether funds chosen based on various fund characteristics in a given year can yield superior performance the following year. The authors find that a portfolio of funds chosen based on the combination of characteristics of lowest expense ratio, and lowest turnover and highest Sharpe ratio, generates considerably better future performance than the average actively-managed fund, and the difference in returns is statistically significant.

TOPICS: Portfolio theory, portfolio construction, style investing, performance measurement

Key Findings

• • Actively-managed mutual funds with lower expense ratios provide higher returns in the following year.

• • But considerably better returns are achievable from low-expense funds with low portfolio turnover and high Sharpe ratios.

• • There is sufficient persistence in cost and risk-control characteristics that investors can obtain better long-run results using the selection criteria proposed.