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Madeline Dewoody, ’21

PhD, Finance

How do mutual fund investment advisors evaluate their fund performance, and how do these performance metrics compare to those presented in the mutual fund’s prospectus?

I describe two sets of mutual fund benchmarks. First, are the benchmarks that mutual fund investment advisors use to measure performance when determining manager compensation. Second, are the benchmarks that are displayed in the mutual fund prospectus, and are used to portray the funds’ performance externally. I find that almost three-quarters of funds use different benchmarks for compensation versus what they display in the prospectus, and that the compensation benchmarks tend to be more narrowly defined.

My research provides individual investors with a more accurate view of the motivations and benchmarks driving mutual fund managers investment decisions, and it also provides academics with an alternative benchmark - the compensation benchmark excess return - against which to measure mutual fund performance.