Portfolio quality and mutual fund performance

David R. Gallagher, Peter A. Gardner, Camille H. Schmidt*, Terry S. Walter

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

14 Citations (Scopus)

Abstract

This study investigates how the quality of stocks owned by mutual funds affects the performance of those funds during 2000-2009. The quality of a stock is positively related to its size, while quality is inversely related to volatility. Evidently, stocks in the lowest quality decile perform particularly poorly amidst volatile market conditions with a mean monthly Daniel, Grinblatt, Titman and Wermers (DGTW) alpha 1.93% [25.73% per annum (pa)] less than high-quality stocks. Furthermore, funds which hold the lowest quality stocks exhibit substantial underperformance, particularly during market downturns, with funds in the lowest decile of quality incurring a mean monthly DGTW alpha 0.96% (12.14% pa) lower than their higher quality counterparts. Interestingly, we discover a trend to funds investing in higher quality stocks over time.

Original languageEnglish
Pages (from-to)485-521
Number of pages37
JournalInternational Review of Finance
Volume14
Issue number4
DOIs
Publication statusPublished - 1 Dec 2014

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