Performance Implications of Holding Multiple Mutual Funds with the Same Investment Objective

Most investors seeking cost-effective diversification and professional management benefits utilize mutual funds in their portfolios. The mutual fund industry has experienced a continual proliferation of funds and fund types with different investment objectives. Diversification benefits of forming po...

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Bibliographic Details
Published in:Journal of Investing 2006-04, Vol.15 (1), p.62-78
Main Authors: Louton, David, Saraoglu, Hakan
Format: Article
Language:English
Subjects:
Benchmarks
Diversification
Investment plans
Investment policy
Mutual funds
Portfolio diversification
Studies
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Summary:Most investors seeking cost-effective diversification and professional management benefits utilize mutual funds in their portfolios. The mutual fund industry has experienced a continual proliferation of funds and fund types with different investment objectives. Diversification benefits of forming portfolios of mutual funds have been investigated by various studies in the literature. In this study, the authors investigate the potential diversification benefits of a portfolio of funds with the same investment objective and compare the terminal wealth performance of a portfolio of funds with the performance of the relevant asset class. The authors find that simulated portfolios of six aggressive growth funds underperform the S&P 500 Index with an 86.79% probability, and simulated portfolios of six high quality corporate bond funds have a 97.88% probability of underperforming the Lehman Brothers Aggregate Bond Index. This finding is in line with the previous research showing that a majority of mutual funds underperform their benchmarks.
ISSN:1068-0896
2168-8613
DOI:10.3905/joi.2006.616846