A new academic paper introduces the MMT model, which improves upon standard methods by correcting for benchmark biases and incorporating peer performance, proving more effective at identifying persistent winner, writes Cesario Mateus, Irina B. Mateus and Natasa Todorovic

In the ever-evolving world of finance, selecting mutual funds that consistently outperform the market is a challenge that both investors and fund managers grapple with. Mutual funds are a cornerstone of modern investment portfolios, offering diversification and professional management.

However, the ability of funds to consistently deliver above-average returns, referred to as “persistence” in performance, has long been debated. Extensive research on actively managed equity funds has traditionally relied on the Fama-French and Carhart factor models to assess performance, generally finding that most funds fail to outperform their benchmarks after accounting for fees, with a few exclusions, and has provided scarce evidence of performance persistence. However, recent studies have criticised the Fama-French factor models for their arbitrary factor construction and, as a result, the disproportionate weighting of value and small-cap stocks, introducing bias. This results in non-zero alphas for passive benchmarks when evaluated against the Carhart four-factor model, undermining alpha as a reliable indicator of a manager’s........

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