Yes, the choice of performance measure does matter for ranking of us mutual funds

Abstract

Recent literature in performance evaluation has focused on preferences and characteristics of returns' distribution that go beyond mean and variance world. However, Eling (2008) compared the Sharpe ratio with some of these performance measures, and found virtually identical rank ordering using mutual fund data. This paper compares 13 performance measures with the traditional Sharpe Ratio using a sample of US Fixed-Income, Equity and Asset Allocation Mutual Funds. Results show that performance measures based on absolute reward-risk ratios have similar rankings, when the numerator (mean excess return) is the same. However, when we move to other types of performances measures, results may be significantly different. This is the case of the Manipulation-Proof Performance Measure (MPPM), Upside Potential Ratio, and Appraisal Ratio. Results are especially different for the MPPM. Robustness checks show that some of the performance measures are very sensitive to parameters' changes. Therefore, the choice of the performance measure is actually important for mutual fund ranking and selection. As a consequence, we argue that the use of several performance measures and rankings have a positive impact on the mutual fund's industry, reducing concentration.