Article Details New Method to Analyzing Mutual Fund Performance

Dr. Scott Stewart, clinical professor of finance and accounting in the Samuel Curtis Johnson Graduate School of Management at Cornell University, along with several co-authors, published a paper in the Journal of Portfolio Management titled, “Improving Equity Fund Alpha Estimates with a Second Size Factor.” The paper describes an improved way to measure fund manager skill by proposing company size should be broken into two sub-groups: big vs. mid-cap and mid-cap vs. small, rather than using only one size comparison. The classical approach to measuring performance has previously been the Fama-French Model which added size and value risk factors to previously utilized market risk factors. The authors note that the downside of Fama-French is that it only compares large and small companies rather than including mid-cap companies (those valued between $2 billion and $10 billion). The authors found that by using their technique, fund managers’ rankings shifted between quartiles “nearly 22% of the time” and “almost 10% of managers moved above or below the median performer.” Dr. Stewart stated the technique he and his co-authors put forth impacts fund managers because it may “move you from being below average to above average, or vice versa.” He added if a manager was “above or below average simply because of the way your portfolio size was structured, the typical Fama-French approach wouldn’t understand that” whereas his approach adjusts for that discrepancy. The Mutual Fund Directors Forum plans to host a webinar with Dr. Stewart to discuss his findings on Wednesday, September 13. 

Click here to read the article in the Journal of Portfolio Management.
Click here to read an article in the Cornell Chronicle summarizing the paper’s findings.