Controlling for Fixed-Income Exposure in Portfolio Evaluation: Evidence from Hybrid Mutual Funds

George Comer, Norris Larrymore and Javier Rodriguez

The Review of Financial Studies, 2009, vol. 22, issue 2, 481-507

Abstract: We examine whether explicitly controlling for the fixed-income exposure of mutual funds affects conclusions drawn in performance assessment. We focus on daily return data from two hybrid mutual fund samples. Comparing abnormal performance estimates from the Carhart (1997) model to extensions designed to correct for bond holdings, we find that the estimates within one of our samples change from positive to significantly negative. Additional evidence indicates that cash flows to the funds are more closely correlated with the traditional Carhart measure, clearly indicating that the absence of bond indices misleads investors who use a fund's risk-adjusted performance as the basis for investment decisions. The Author 2007. Published by Oxford University Press on behalf of the Society for Financial Studies. All rights reserved. For permissions, please e-mail: journals.permissions@oxfordjournals.org., Oxford University Press.

Date: 2009
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