EVALUATING MUTUAL FUNDS ON A SMALL MARKET: IS BENCHMARK SELECTION CRUCIAL ?

We perform a comprehensive analysis of different types of Finnish mutual funds. First, different measures of performance are compared. Secondly, benchmark sensitivity is analysed by the use of various single and multiple index models, including benchmarks such as the FOX and HEX indices, a small firm index, and a bond index. The question of benchmark sensitivity is especially crucial on a small market such as the Finnish one, where fund legislation in combination with large weights for individual stocks can prevent funds from following the index. We also investigate market timing ability as well as the stability of superior / inferior performance during a time period during which successful market timing would have been substantially beneficial. Finally, performance measures are related to fund characteristics such as fund expenses, and fund size. Contrary to many studies documenting great benchmark sensitivity, we find markedly similar rankings for different benchmarks. No evidence of performance persistence is found. When performance is related to fund characteristics, we find a negative relationship between the fund's expense ratio and its Jensen Measure, giving support to the view that management does not increase performance sufficiently to justify higher fees.