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Benchmarking benchmarks: measuring characteristic selectivity using portfolio holdings data

journal contribution
posted on 01.12.2008, 00:00 authored by K Fong, D R Gallagher, Adrian LeeAdrian Lee
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.

History

Journal

Accounting and finance

Volume

48

Issue

5

Pagination

761 - 781

Publisher

John Wiley & Sons

Location

Chichester, Eng.

ISSN

0810-5391

eISSN

1467-629X

Language

eng

Publication classification

C1.1 Refereed article in a scholarly journal