City Research Online

Abstract

Standard Fama-French-Carhart (FFC) models are widely used by academics to assess risk-adjusted fund performance versus market, size, style and momentum factors. However, they fail to reflect the industry standard, following which the performance of money managers is commonly evaluated relative to a corresponding benchmark and the peer group. In this paper, we introduce a new approach that augments the Carhart model and enables investors to identify the funds that outbid both the benchmark and the peer group. In addition, it allows discovering more certain winners by eliminating the under/outperformance of funds driven by the bias in the FFC factor construction. The application of our model is illustrated on Large Cap Value and Large Cap Growth US active equity mutual funds using contingency tables. The performance and persistence in performance are assessed by comparing our novel and the standard Carhart models. Our model identifies more winners than the Carhart; those winners earn higher returns net of benchmark and peer- group than the Carhart’s winners, and show persistence in performance 36 months ahead. The results are robust to different specifications of contingency tables, holding periods or style categories of funds.

Publication Type:	Article
Additional Information:	© 2024 The Author(s). Published by Informa UK Limited, trading as Taylor & Francis Group. This is an Open Access article distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. The terms on which this article has been published allow the posting of the Accepted Manuscript in a repository by the author(s) or with their consent.
Publisher Keywords:	US equity mutual funds, Carhart model, Benchmark-adjusted alphas, Peer-group-adjusted alphas, Performance persistence
Subjects:	H Social Sciences > HG Finance
Departments:	Bayes Business School Bayes Business School > Finance
SWORD Depositor:	Symplectic Administrator

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