New evidence on equity fund performance: A trivariate sort of drivers approach

Abstract

Investment funds are some of the most common financial instruments due to their ability to offer diversification at an affordable price. Nevertheless, there is no conclusive research outlining what characteristics drive performance, leaving investors with little guidance during the capital allocation process. This paper proposes the Fund Triver Cube, a diagram that comprises three performance drivers extending the current classification of funds by the Morningstar Style Box, thus allowing researchers and investors to conduct better performance evaluation among funds. The axes of the cube correspond to the drivers, each divided in three categories: management strategy, which includes active, passive and smart beta; size focus, comprised of large, mid and small; and style orientation, composed of growth, value and blend. Later on, we employ the Fund Triver Cube to study the performance of mutual funds and ETFs in the United States from July, 2007, to January, 2022, by classifying them in groups featuring one category per driver, and assessing their cumulative excess returns and risk-return relationship. The study finds that smart beta and growth are the best-performing categories within the strategy and style drivers, respectively, and that there is no significant difference between the performance of funds regarding their size focus. Key words: Morningstar Style Box, investing style, investing strategy, investing size, drivers, performance, Fund Triver Cube.