Predicting returns of equity mutual funds

Olaf Stotz

Journal of Asset Management, 2009, vol. 10, issue 3, No 3, 158-169

Abstract: Abstract This paper investigates 1-year-ahead forecasts of actively managed equity mutual funds. A multifactor forecast model is developed that employs forecasts on the manager's skill, the fund's style and the expected factor returns. On the basis of a sample of German equity funds, we show that this forecast model substantially improves forecast power in relation to a naïve forecast model, which just extrapolates past returns into the future. In particular, the multifactor model reduces the mean-squared error (mean absolute error) by up to 30 per cent compared to the naïve model. More importantly, from the perspective of a mutual fund investor, the return of top-decile funds chosen by the multifactor model exceeds the average return of all funds by more than 200 basis points per year.

Keywords: out-of-sample return forecasting; mutual funds; multifactor model; naïve investor (search for similar items in EconPapers)
Date: 2009
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DOI: 10.1057/jam.2009.7

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