Return Horizon and Mutual Fund Performance
69 Pages Posted: 24 Mar 2020 Last revised: 15 Jun 2021
Date Written: June 14, 2021
Measures of investment performance depend on the horizon over which returns are assessed. While 47% of U.S. equity mutual fund returns exceed matched-month SPY ETF returns, only 29% of the funds outperform the SPY in terms of compound returns over the full 1991-2018 sample period. More important, alpha, the canonical measure of mean return after allowing for systematic (beta) risk, depends on return horizon, because beta depends on horizon. Compared to a benchmark of 41% estimated in monthly returns, the percentage of mutual funds with positive alpha estimates against the SPY decreases to 21% (increases to 46%) at the decade return horizon for funds with high (low) estimated monthly market betas. Alphas estimated from short-horizon (e.g. monthly) returns may be uninformative or even misleading regarding fund performance for investors with longer horizons.
JEL Classification: G10; G23
Suggested Citation: Suggested Citation