Mutual Fund Risk Premia – A Quantitative Framework for Mutual Fund Selection
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Abstract
A popular strategy to assess mutual funds is to look at past returns and rank funds based on their risk and return characteristics. This simple approach has its advantages but it is uni-dimensional in nature and misses important characteristics that may impact future returns. We propose investors use fund characteristics to create more intuitive and sensible portfolios which are diversified across investment styles and generate better risk-adjusted performance compared to a market cap weighted Index. The research findings using fifteen years of monthly data since 2000 show that a concentrated mutual fund portfolio with fund characteristics as defined by value, low volatility and momentum beat the benchmark by 5.24%, 6.20%, and 7.03% respectively.