Conditional Performance Evaluation , Revisited

This monograph revisits and extends major empirical findings of the literature on conditional performance evaluation (CPE) for U.S. equity mutual funds. This approach allows expected performance and fund risk to vary over time with the state of the economy. We use an improved and expanded data set, a more extensive list of variables reflecting the state of the economy than in previous work, and some refinements in methodology. Among various proxies for the state of the economy, we find that the states of the term structure of interest rates are informative about fund performance and risk exposures relative to a broad equity index. States of the macroeconomy are informative about performance relative to fund style benchmarks. Balanced and asset-allocation style funds respond most strongly to the states of the financial markets. We confirm that conditional models make the average performance of U.S. equity funds look better than traditional methods. Overall, US Equity style funds deliver neutral risk adjusted performance, which implies that fund managers have just enough investment ability to cover trading costs and expenses. There is some evidence that conditional performance and timing ability is concentrated in certain fund types and in certain states of the economy. Our findings have a variety of implications for practicing financial analysts.