Evaluating managed fund performance using conditional measures: Australian evidence

Abstract

Most studies of managed fund performance use measures that are susceptible to bias caused by common time variation in risks and risk premia. Ferson and Schadt (1996) propose a conditional performance measure that controls for the common variation. Their results suggest that incorporating lagged public information variables that have been shown to predict stock returns, such as interest rates and dividend yields, is an improvement over traditional measures. This study applies conditional performance models in analysing managed fund performance in Australia 1983 - 1995. The results confirm the importance of using conditioning information, especially dividend yield, in performance evaluation. Consistent with Ferson and Schadt's (1996) findings, alphas are higher when estimated with the conditional model and the number of significant timing coefficients is greatly reduced.