Enhancing Mutual Fund Performance Analysis with Financial Statement Information

While financial statement analysis is frequently used to evaluate the fundamental performance of operating companies, this study shows that financial statement information can be used to evaluate mutual funds as well. Financial ratios constructed from mutual funds’ individual financial statements differentiated future out- and underperformers by up to 4.5% and 1.6% of annual alpha in out-of-sample equity and fixed-income funds, respectively, and in excess of commonly used fund characteristics. Financial ratios reflecting the profitability of a fund’s investment strategy improved predictive accuracy more than ratios reflecting its operating efficiency or leverage and funding. These techniques and results present a financial decomposition of mutual fund performance.