MEASURING MUTUAL FUND PERFORMANCE WITH CHARACTERISTIC-BASED BENCHMARKS

This article develops and applies new measures of portfolio performanc e which use benchmarks based on the characteristics of stocks held by the portfolios that are evaluated. Specifically, the benchmarks are co nstructed from the returns of 125 passive portfolios that are matched with stocks held in the evaluated portfolio on the basis of the market capitalization, book-to-market, and prior-year return characteristics of those stocks. Based on these benchmarks, '' Characteristic Timing '' and '' Characteristic Selectivity '' measures are developed that de tect, respectively, whether portfolio managers successfully time their portfolio weightings on these characteristics and whether managers ca n select stocks that outperform the average stock having the same char acteristics. We apply these measures to a new database of mutual fund holdings covering over 2500 equity funds from 1975 to 1994. Our result s show that mutual funds, particularly aggressive-growth funds, exhibi t some selectivity ability, but that funds exhibit no characteristic t iming ability.