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RFS Advance Access published online on December 20, 2007
Review of Financial Studies, doi:10.1093/rfs/hhm087
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© 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.

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

George Comer
Georgetown University

Norris Larrymore
Quinnipiac University

Javier Rodriguez
University of Puerto Rico

Address correspondence to G. Comer, 417 Old North, Georgetown University, Washington, DC 20057; telephone: (202) 687-0676; e-mail: gc45{at}georgetown.edu.

JEL Classification: G11, G12


  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.

We appreciate the comments of Jeffrey Busse, Martin Gruber, Phyllis Keys, Wayne Lee, Matthew Spiegel (the editor), and an anonymous referee. In addition, we appreciate the feedback of workshop participants at the 2006 Center for Research in Security Prices (CRSP) Forum, Georgetown University, and Hofstra University. We also thank Eric Gauthier, Herminio Romero, and Dustin Salvenson for excellent research assistance. Comer acknowledges the financial support provided by the Georgetown University Graduate School of Arts and Sciences and the Dean's Leadership Fund of the McDonough School of Business. Rodriguez acknowledges the financial support provided by the University of Puerto Rico Graduate School of Business Administration and Office of the Dean of Graduate Studies and Research.


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