Benchmarking benchmarks: measuring characteristic selectivity using portfolio holdings data

Kingsley Fong*, David R. Gallagher, Adrian D. Lee

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

14 Citations (Scopus)


This study proposes methodological adjustments to the widely adopted performance benchmarking methodology of Daniel et al. (1997) as a means of improving the precision of alpha measurement for active equity fund managers. We achieve this by considering the monthly updating of characteristic benchmarks and to ensure neutrality to the Standard & Poor's/Australian Stock Exchange 300 index. Applying this benchmark to a representative sample of active Australian equity funds and simulated passive portfolios that mimic fund manager-style characteristics, we find statistically different and lower tracking error compared with using the standard characteristic benchmark methodology. We also find evidence that the modified benchmark statistically infers an alpha closer to zero compared with the standard benchmark methodology. Our findings suggest that improved specifications of characteristic benchmarks represent better methods in quantifying fund manager skill.

Original languageEnglish
Pages (from-to)761-781
Number of pages21
JournalAccounting and Finance
Issue number5
Publication statusPublished - Dec 2008
Externally publishedYes


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