Rating mutual funds

Construction and information content of an investor-cost based rating of Danish mutual funds

Publikation: Bidrag til tidsskriftTidsskriftartikelForskningpeer review

Resumé

We develop a new rating of mutual funds: the atpRating. The atpRating assigns crowns to each individual mutual fund based upon the costs an investor pays when investing in the fund in relation to what it would cost to invest in the fund's peers. Within each investment category, the rating assigns five crowns to funds with the lowest costs and one crown to funds with the highest costs.

We investigate the ability of the atpRating to predict the future performance of a fund. We find that an investor who has invested in the funds with the lowest costs within an investment category would have obtained a risk-adjusted excess return that is approximately 3-4 percentage points higher per annum than if the funds with the highest costs had been invested in.

We compare the atpRating with the Morningstar Rating. We show that one reason why the atpRating and the Morningstar Rating contain different information is that the returns Morningstar uses as inputs when rating funds are highly volatile whereas the costs the atpRating uses as inputs when rating funds are highly persistent. In other words, a fund that has low costs one year will most likely also have low costs the following year, whereas the return of a fund in a certain year generally contains only little information about the future return that the fund will generate.

Finally, we have information on the investments in different mutual funds made by a small subgroup of investors known to have been exposed to both the atpRating and the Morningstar Rating. We find that investors have clear preferences for funds rated high by both the atpRating and the Morningstar Rating.


OriginalsprogEngelsk
TidsskriftJournal of Empirical Finance
Vol/bind14
Udgave nummer5
Sider (fra-til)662-693
Antal sider32
ISSN0927-5398
DOI
StatusUdgivet - 2007

Emneord

  • udenforområde
  • Ratings & Rankings
  • Investeringsforeninger
  • Danmark

Citer dette

@article{1a350e00939f11dcac24000ea68e967b,
title = "Rating mutual funds: Construction and information content of an investor-cost based rating of Danish mutual funds",
abstract = "We develop a new rating of mutual funds: the atpRating. The atpRating assigns crowns to each individual mutual fund based upon the costs an investor pays when investing in the fund in relation to what it would cost to invest in the fund's peers. Within each investment category, the rating assigns five crowns to funds with the lowest costs and one crown to funds with the highest costs. We investigate the ability of the atpRating to predict the future performance of a fund. We find that an investor who has invested in the funds with the lowest costs within an investment category would have obtained a risk-adjusted excess return that is approximately 3-4 percentage points higher per annum than if the funds with the highest costs had been invested in. We compare the atpRating with the Morningstar Rating. We show that one reason why the atpRating and the Morningstar Rating contain different information is that the returns Morningstar uses as inputs when rating funds are highly volatile whereas the costs the atpRating uses as inputs when rating funds are highly persistent. In other words, a fund that has low costs one year will most likely also have low costs the following year, whereas the return of a fund in a certain year generally contains only little information about the future return that the fund will generate. Finally, we have information on the investments in different mutual funds made by a small subgroup of investors known to have been exposed to both the atpRating and the Morningstar Rating. We find that investors have clear preferences for funds rated high by both the atpRating and the Morningstar Rating.",
keywords = "udenforomr{\aa}de, Ratings & Rankings, Investeringsforeninger, Danmark",
author = "Bechmann, {Ken L.} and Jesper Rangvid",
year = "2007",
doi = "10.1016/j.jempfin.2007.03.001",
language = "English",
volume = "14",
pages = "662--693",
journal = "Journal of Empirical Finance",
issn = "0927-5398",
publisher = "Elsevier",
number = "5",

}

Rating mutual funds : Construction and information content of an investor-cost based rating of Danish mutual funds. / Bechmann, Ken L.; Rangvid, Jesper.

I: Journal of Empirical Finance, Bind 14, Nr. 5, 2007, s. 662-693.

Publikation: Bidrag til tidsskriftTidsskriftartikelForskningpeer review

TY - JOUR

T1 - Rating mutual funds

T2 - Construction and information content of an investor-cost based rating of Danish mutual funds

AU - Bechmann, Ken L.

AU - Rangvid, Jesper

PY - 2007

Y1 - 2007

N2 - We develop a new rating of mutual funds: the atpRating. The atpRating assigns crowns to each individual mutual fund based upon the costs an investor pays when investing in the fund in relation to what it would cost to invest in the fund's peers. Within each investment category, the rating assigns five crowns to funds with the lowest costs and one crown to funds with the highest costs. We investigate the ability of the atpRating to predict the future performance of a fund. We find that an investor who has invested in the funds with the lowest costs within an investment category would have obtained a risk-adjusted excess return that is approximately 3-4 percentage points higher per annum than if the funds with the highest costs had been invested in. We compare the atpRating with the Morningstar Rating. We show that one reason why the atpRating and the Morningstar Rating contain different information is that the returns Morningstar uses as inputs when rating funds are highly volatile whereas the costs the atpRating uses as inputs when rating funds are highly persistent. In other words, a fund that has low costs one year will most likely also have low costs the following year, whereas the return of a fund in a certain year generally contains only little information about the future return that the fund will generate. Finally, we have information on the investments in different mutual funds made by a small subgroup of investors known to have been exposed to both the atpRating and the Morningstar Rating. We find that investors have clear preferences for funds rated high by both the atpRating and the Morningstar Rating.

AB - We develop a new rating of mutual funds: the atpRating. The atpRating assigns crowns to each individual mutual fund based upon the costs an investor pays when investing in the fund in relation to what it would cost to invest in the fund's peers. Within each investment category, the rating assigns five crowns to funds with the lowest costs and one crown to funds with the highest costs. We investigate the ability of the atpRating to predict the future performance of a fund. We find that an investor who has invested in the funds with the lowest costs within an investment category would have obtained a risk-adjusted excess return that is approximately 3-4 percentage points higher per annum than if the funds with the highest costs had been invested in. We compare the atpRating with the Morningstar Rating. We show that one reason why the atpRating and the Morningstar Rating contain different information is that the returns Morningstar uses as inputs when rating funds are highly volatile whereas the costs the atpRating uses as inputs when rating funds are highly persistent. In other words, a fund that has low costs one year will most likely also have low costs the following year, whereas the return of a fund in a certain year generally contains only little information about the future return that the fund will generate. Finally, we have information on the investments in different mutual funds made by a small subgroup of investors known to have been exposed to both the atpRating and the Morningstar Rating. We find that investors have clear preferences for funds rated high by both the atpRating and the Morningstar Rating.

KW - udenforområde

KW - Ratings & Rankings

KW - Investeringsforeninger

KW - Danmark

U2 - 10.1016/j.jempfin.2007.03.001

DO - 10.1016/j.jempfin.2007.03.001

M3 - Journal article

VL - 14

SP - 662

EP - 693

JO - Journal of Empirical Finance

JF - Journal of Empirical Finance

SN - 0927-5398

IS - 5

ER -