On The Predictability Of Mutual Fund Returns
Zakri Y. Bello, Central Connecticut State University
Common indicators of business and monetary conditions, the lagged mutual-fund-risk
premium, and the market-risk premium, are used to predict mutual-fund returns for a time
horizon of one-month. In isolation, each of the five predictors significantly forecast
mutual-fund returns from April 1991 to March 2006. The indicator of monetary
conditions, i.e. the federal funds premium, is found to have the strongest forecast power.
Multivariate analyses confirm that the five predictors are indeed strong forecasters of
mutual fund returns. Moreover, the federal funds premium, the market-risk premium, and
the lagged mutual-fund-risk premium all emerge as the best and most consistent
predictors of mutual fund returns. The default-risk premium and term premium are found
to be good but less consistent as predictors of mutual-fund.
Keywords: Mutual funds, performance evaluation, performance prediction, financial
JEL Codes: G12, G14, G17