Equity Income Fund has an expense ratio of 0.71% and an R-squared of 89%.
WSJ: Upside: How to Find a Fund Manager Who Can Beat the Market
The R-squared statistic for the relationship is practically zero, indicating no relationship between the two series.
FORBES: The Case For Higher Stock Prices After Tax Increases
The R-squared statistic for this relationship is also practically zero, again indicating no relationship.
FORBES: The Case For Higher Stock Prices After Tax Increases
Amihud, expected to be published this year, finds that the median fund has an R-squared of 93%.
WSJ: Upside: How to Find a Fund Manager Who Can Beat the Market
Actively managed funds should have a low R-squared, because portfolio managers are supposedly paid to make index-beating bets.
WSJ: Upside: How to Find a Fund Manager Who Can Beat the Market
To be sure, funds with a low R-squared performed worse during the financial crisis than index huggers, notes Notre Dame's Prof.
WSJ: Upside: How to Find a Fund Manager Who Can Beat the Market
Amihud uses a statistical measure called "R-squared" to observe how much of active fund managers' returns can be explained simply by the index.
WSJ: Upside: How to Find a Fund Manager Who Can Beat the Market
We are going to focus on three: R-Squared, Beta, and Alpha.
FORBES: Three Essential Metrics Mutual Fund Investors Need to Know
You can turn up attractive funds by homing in on candidates with an R-squared below the median of 93% and an expense ratio of 0.86% or below.
WSJ: Upside: How to Find a Fund Manager Who Can Beat the Market
In fact, for every 10% reduction in R-squared, an investor improves his performance by 0.8 percentage point, after adjusting for size, style and other factors, according to Prof.
WSJ: Upside: How to Find a Fund Manager Who Can Beat the Market
You can find a mutual fund's R-squared on Morningstar.com.
WSJ: Upside: How to Find a Fund Manager Who Can Beat the Market
The following Exhibit compares R-Squared, Beta, and Alpha for two hypothetical large-cap equity funds, and will be used to demonstrate how investors can more meaningfully compare the performance of mutual funds.
FORBES: Three Essential Metrics Mutual Fund Investors Need to Know
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