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 skill. For example, research has shown a Carhart alpha of 0.82 per cent for the S&P 500 from 1980 to 2005, a high of 7.5 per cent for the Russell 2500 Value index from 1995 to 2004, and consistently negative alphas for the FTSE 100 from 1992 to 2013, illustrating how factor design distorts performance evaluations.
Emerging research also underscores the value of incorporating active peer benchmarks in performance analysis. Discrepancies in self-selected benchmarks, the limited availability of style-specific indices (e.g., FTSE or MSCI classifications), and the lack of focus on relative peer performance can misrepresent a fund’s success. Investors are particularly interested in how funds rank among peers, as a fund may surpass its benchmark but lag in its peer group, or it may underperform during market slumps yet still lead its peers.
A recent academic paper, Mutual Fund Performance: The Model for Selecting Persistent Winners by Mateus, C., Mateus, I.B., and Todorovic, N., published in The European Journal of Finance (2025, Vol. 31, Issue 5, pp. 647–669) suggests a new unified framework that eliminates the bias of passive benchmark alphas (as measures of excess performance) and enhances the Carhart model further by incorporating relative peer performance in the analysis. The new MMT model introduces a new, practical way to evaluate mutual funds that better aligns with how investment professionals actually assess performance. It offers fresh insights into identifying mutual funds with persistent superior performance, as it allows for identifying genuine, true winners —the funds with the best stock-picking ability in comparison to their peers, which drives future overperformance in the subsequent 36 months.