A replacement method in evaluating the performance of international mutual funds

Abstract

Purpose

The purpose of this paper is to appraise the risk‐adjusted performance of international mutual funds using measures generated by the optimized variance (OV), and to promote ability of portfolio managers and investors in making logical decisions.

Design/methodology/approach

This study appraises the performance of 65 international mutual funds via the optimized risk‐adjusted measures during monthly period of 2001‐2010. Using 65 linear programming models, the OV is calculated to optimize the standard deviation of any funds. Then, another model is run to get the OV of market index. Consequently, seven optimized performance measures namely Treynor, Sharpe, Jensen's alpha, M‐squared, information ratio (IR), MSR, and FPI along with the optimized leverage factor are proposed to evaluate the performance of these mutual funds. Finally, the optimized measures are used to evaluate the funds during pre and post‐crisis periods in order to compare the funds' performance over the crisis periods.

Findings

The empirical evidence detects which OV, as measured by the Markowitz's linear programming model, is an important determinant in the performance evaluation measures. Using OV statistic and also its standard deviation, this paper shows that new optimized measures are mostly over‐performed rather than the benchmark index; in addition these optimized measures have close correlation with the conventional performance measures. The evidence shows that the average of the optimized measures during crisis has the lowest performance in comparison with other research periods. The results therefore highlight the importance of using the new optimized measures along with the conventional measures in the evaluation of mutual funds' performance.

Research limitations/implications

It can be worthwhile to compare the optimized measure and also the conventional measures in identifying their superior measures.

Practical implications

The result of this study can be directly used as initial data to make decision by investors and portfolio managers who are seeking the possibility of participating in the global stock market through international mutual funds.

Originality/value

This paper is one of the first studies that optimizes the variance of return for any fund to suggest four optimized measures of Sharpe, IR, MSR, and FPI, and then proposes a new linear programming model to get OV of market index in introducing four optimized new measures of Treynor, M‐square, Jensen's alpha, and leverage factor.

Citation

Reza Tavakoli Baghdadabad, M. (2013), "A replacement method in evaluating the performance of international mutual funds", International Journal of Emerging Markets, Vol. 8 No. 2, pp. 144-169. https://doi.org/10.1108/17468801311307019