| The primary objective of this study is to determine whether certain corporate financial statement information is useful in explaining mutual fund performance and rationalizing the evidence of performance persistence identified, but not explained, in prior studies. A related objective is to determine whether there is a difference in the performance of value- and growth-stock mutual funds. These funds are classified using corporate financial statement information.; This study adopts a unique asset-pricing approach in examining mutual fund performance. The approach specifies a mutual fund performance-characteristics model in which mutual fund returns are a function of fund characteristics including betas, expense ratios, and certain corporate size and style variables. Size refers to market equity; style refers to fundamental financial statement variables such as common stock book value-to-market value, earnings-to-market value, and cash flow-to-market value. A mutual fund's corporate-financial-statement characteristics are estimated each fiscal year from the respective values for the corporations whose stocks are held in the fund's portfolio at year-end.; The study examines the 1976-1983 performance of a random sample of sixty stock mutual funds. This period includes virtually all the years described in prior studies as having the strongest evidence of persistence. Consistent with prior research, this study finds strong persistence in one-year beta-adjusted performance. The persistence is not weakened materially by adding expense ratios to the performance-characteristics model. When the model includes mutual fund size and style characteristics, however, the statistically-significant evidence of persistence is eliminated. The results are robust to a split in the sample period and to an increase in the performance period to two years.; Prior research has found that theoretical portfolios of value stocks significantly outperform theoretical portfolios of growth stocks. These past studies classify stocks on the basis of various fundamental financial statement information. This study contrasts the performance of value- and growth-portfolios consisting of mutual funds similarly classified. Contrary to the theoretical-portfolio results, this study finds that value-stock mutual funds do not significantly outperform growth-stock funds in practice. |
