A robust nonparametric approach to evaluate and explain the performance of mutual funds

The topic of the measurement of mutual funds' performance is receiving an increasing interest both from an applied and a theoretical perspective. Beside the traditional financial literature, a growing body of studies has started to apply the tools of frontier analysis for benchmarking comparisons in portfolio analysis. Our paper contributes to this literature proposing a robust nonparametric approach for analysing mutual funds. It is based on the concept of order-m frontier [Cazals, C., Florens, J.P., Simar, L., 2002. Nonparametric frontier estimation: A robust approach. Journal of Econometrics 106, 1-25] and on a probabilistic approach [Daraio, C., Simar, L., 2005. Introducing environmental variables in nonparametric frontier models: A probabilistic approach. Journal of Productivity Analysis 24 (1), 93-121] to find out the factors explaining mutual funds' performance. Within this framework, a decomposition of conditional efficiency is proposed, and its usefulness for economic interpretation analysed. Our approach is illustrated by using US mutual funds data, grouped for category by objective. Economies of scale, slacks and market risks are investigated. A comparison of traditional, nonparametric and robust performance measures is also offered.