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Financial Markets and Portfolio Management

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14-10-2024

The performance of asset allocation mutual funds

Authors: Zhengnan Yin, Niall O’Sullivan, Meadhbh Sherman

Published in: Financial Markets and Portfolio Management | Issue 4/2024

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Abstract

We analyze the performance of asset allocation funds using a best-fit multifactor model that includes both stock and bond market factors. Utilizing large samples of allocation funds from both the US and the UK, we find that, on average, asset allocation funds do not outperform their benchmarks, and there is little or weak evidence of performance persistence when examining both decile portfolios and small-size portfolios. However, asset allocation funds still demonstrate superior abilities. At the individual fund level, some funds exhibit significant positive alphas, stock market timing, and bond market timing in both the US and UK markets. Furthermore, we find that US allocation funds with low past maximum drawdowns (MDDs) outperform those with high past MDDs during periods of high stock market returns and high stock market volatility. In contrast, UK allocation funds with low past MDDs outperform those with high MDDs when bond market returns are high.

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Available only for authorised users

UK funds under management data are available at the Investment Association. https://www.theia.org/industry-data/fund-statistics/funds-under-management/4.

Comer (2006) focuses on analysing the stock market timing ability of allocation funds, although they incorporate a term to capture bond market timing ability.

In April 2013, Morningstar renamed its balanced fund category to asset allocation funds.

Available at https://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html.

Available at http://business-school.exeter.ac.uk/about/departments/accounting-finance/famafrench/.

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Note that the equation is equal to \(r_{i,t} = \alpha_{i,t} + \mathop \sum \limits_{j = 1}^{n} \beta_{j,t} f_{j,t} + \varepsilon_{i,t}\).

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Title: The performance of asset allocation mutual funds
Authors: Zhengnan Yin
Niall O’Sullivan
Meadhbh Sherman
Publication date: 14-10-2024
Publisher: Springer Berlin Heidelberg
Published in: Financial Markets and Portfolio Management / Issue 4/2024
Print ISSN: 1934-4554
Electronic ISSN: 2373-8529
DOI: https://doi.org/10.1007/s11408-024-00457-2

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