Blog - Investing Notes

February 27, 2008 - The Wall Street Journal's SmartMoney Fund Screen

Does the Wall Street Journal's SmartMoney Fund Screen help its readers beat the market? In the February 2008 version of their paper entitled "Do Mutual Fund Media Recommendations Hold Value? An Empirical Analysis of the Wall Street Journal’s SmartMoney Fund Screen", George Comer, Norris Larrymore and Javier Rodriguez employ two methods to test the performance of mutual funds listed at the ends of the Wall Street Journal's SmartMoney Fund Screen columns during the year before and the year after publication. These weekly columns flag top performing mutual funds based on criteria such as fund objective, historical returns and expense ratios. The authors collect and assign the funds in these lists to one of five fund categories: domestic equity, international equity, sector, hybrid (asset allocation and balanced funds) and fixed income. Using daily returns for 399 mutual funds (263 unique) listed during 2005, they conclude that:

• More than half the mutual funds listed in the column are domestic equity funds. Listed funds tend to be large, with relatively low expense ratios.
• Listed funds on average generate positive alphas during the year before publication, led by the sector fund category.
• After publication, fund performance declines substantially, with only the international equity and hybrid fund categories consistently maintaining positive alphas. The domestic equity category suffers the most drastic decline, with average alpha dropping by about 3% from the pre-publication level into negative territory. Average alpha for the sector fund category also falls by about 3%.
• Degradation of average performance from before to after publication is independent of equity fund style (growth, value, and blend).
• Performance decline is not a function of cash flowing to the funds.
• Most listed funds do not alter risk levels from before to after publication, but those funds that do are much more likely to increase than decrease risk levels.

In summary, the Wall Street Journal's SmartMoney Fund Screen column may have value for picking international and hybrid mutual funds. It is probably not useful for picking domestic equity, sector or fixed income funds, for which strong past performance does not persist after publication.

For related research, see Blog Synthesis: Mutual Funds and Hedge Funds and Blog Synthesis: The Wisdom of Analysts, Experts and Gurus.