MUTUAL FUNDS SELECTION BASED ON FUNDS CHARACTERISTICS

<heading id="h1" level="1" implicit="yes" format="display">Abstract</heading>The popular investment strategy in the literature is to use only past performance to select mutual funds. We investigate whether an investor can select superior funds by additionally using fund characteristics. After considering the fund fees, we find that combining information on past performance, turnover ratio, and ability produces a yearly excess net return of 8.0%, whereas an investment strategy that uses only past performance generates 7.1%. Adjusting for systematic risks, and then using fund characteristics, increases yearly alpha significantly from 0.8% to 1.7%. The strategy that also uses fund characteristics requires less turnover. Copyright (c) 2010 The Southern Finance Association and the Southwestern Finance Association.