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Mutual funds' performance and relative strength of factor exposures

Gaurav S. Chauhan (Department of Finance and Accounting, Indian Institute of Management Indore, Indore, India)

Managerial Finance

ISSN: 0307-4358

Article publication date: 23 December 2022

Issue publication date: 22 June 2023




The purpose of this study is to measure mutual funds' manager performance by attributing it to their abilities to choose better securities (selectivity effect) and to allocate these securities better than their benchmarks (allocation effect). The study enables the authors to examine the relative contributions of the commonly known asset-pricing factors in mutual funds' performance.


To examine managers' ability to steer funds' returns, the authors conduct a two-dimensional holdings-based analysis using factor-specific decomposition of funds' excess returns into their ability to select and allocate securities better than their benchmarks. Subsequently, the authors conduct an analysis of the covariance (ANCOVA) due to these factors in explaining funds' excess returns over time.


While managers' ability to choose better securities than the benchmarks (the selectivity effect) appears modest, some funds (especially the winners) allocate securities in their portfolios better than their benchmarks (the allocation effect) based on their exposures to certain factors (e.g. the momentum factor for the winner funds). However, although funds consistently gain through their ability to predict the size and value factors well, they do not consistently possess the skills to predict the momentum factor.

Research limitations/implications

Although the paper analyzes all the available diversified funds, the sample excludes several other categories, such as thematic and international funds. Further, the analysis is based on equity-oriented Indian funds. Broader studies of changes in factor exposures and the inclusion of more factors apart from those conventionally used may shed more light on the managers' ability to maneuver these factors.

Practical implications

The results show that mutual fund managers lack persistence in their performance, even though some of them could predict specific factors well. Since the activity in active mutual funds could not lead to superior performance over time, investors could be better off by selecting cheaper passive funds for their long-term investments.


The paper presents a novel approach to studying funds' performance by conducting a two-dimensional holdings-based analysis to capture the relative contributions of common asset-pricing factors in the cross-section as well as over time.



Chauhan, G.S. (2023), "Mutual funds' performance and relative strength of factor exposures", Managerial Finance, Vol. 49 No. 7, pp. 1202-1220.



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