Alternative Measures of Mutual Fund Performance: Ranking DFA, Fidelity, and Vanguard
This chapter uses four alternative ways to evaluate mutual fund performance and rank the domestic equity funds of three leading mutual fund companies: DFA, Fidelity, and Vanguard, while splitting the Fidelity and Vanguard funds into indexed and managed portfolios. First, we use the Fama-French factors to show the extent to which various equally-weighted fund portfolios out-returned their empirically determined benchmarks, and characterize the funds according to size and book-to-market value. Our measure tweaks alpha, the extent to which a mutual fund outperforms its benchmark, and we offer a novel interpretation of alpha. Second, we use Sharpe's (1962) style analysis to explore the robustness of our analysis. Third, we ask whether funds out-return the market. Fourth, we compare the fund returns with their published benchmarks and use Fama-French factors to adjust for bias in the benchmarks. Return relative to the stock market reflects style choice, benchmark choice, fees, transaction efficiency, and income from lending to short sellers. Fama-French and Sharpe style adjustment abstract from style choice. Comparison with style-adjusted published benchmarks further abstracts from benchmark choice. Each calculation answers a different question. The Fama-French and Sharpe methods, recorded in Table 6, show that after style adjustment for Fidelity 2001-2018 the indexed portfolio out-returned the managed portfolio. The indexed and managed portfolios from Vanguard and the managed portfolio from Fidelity 2001-2019 out-returned the U.S. stock market as did the Fidelity indexed portfolio 2005-2018. In comparison with the style-adjusted published benchmarks, the Vanguard managed portfolio is the best and the Fidelity managed portfolio is the worst.