PERGAMON Omega, Int. J. Mgmt. Sci.

27 (1999) 373±380

Research Note
Predicting mutual fund performance using arti®cial neural
networks
D.C. Indro a, *, C.X. Jiang a, B.E. Patuwo b, G.P. Zhang c
a
Department of Finance, Kent State University, Kent, OH 44242, USA
b
Department of Administrative Sciences, Kent State University, Kent, OH 44242, USA
c
Department of Decision Sciences, Georgia State University, Atlanta, GA 30303, USA

Received 1 June 1997; accepted 1 August 1998

Abstract

This study utilizes an arti®cial neural network (ANN) approach to predict the performance of equity mutual
funds that follow value, blend and growth investment styles. Using a multi-layer perceptron model and GRG2
nonlinear optimizer, fund-speci®c historical operating characteristics were used to forecast mutual funds' risk-
adjusted return. Results show that ANN generates better forecasting results than linear models for funds of all
styles. In addition, our model outperforms that of Chiang et al. [Chiang WC, Urban TL, Baldridge GW. A neural
network approach to mutual fund net asset value forecasting. Omega Int J Manage Sci 1996:24;205±215.] in
predicting the performance of growth funds. We also employed a heuristic approach of variable selection via neural
networks and compared it with the stepwise selection method of linear regression. Results are encouraging in that
the reduced ANN models still outperform the linear models for growth and blend funds and yield similar results for
value funds. # 1999 Elsevier Science Ltd. All rights reserved.

Keywords: Forecasting; GRG2; Mutual fund performance; Neural networks

1. Introduction Instead, as John Brennan, president of the Vanguard

The record high US$29.39 billion of money in¯ow
to mutual funds in January 1997, which beat the
record US$28.9 billion monthly in¯ow set in January
1996 [28], is a testimony to their popularity as vehicles
of long-term investment, either through the company
pension plans, 401(k), or individual retirement
accounts. With a stake this high, predicting mutual
fund performance is an important issue. Although past
performance does not guarantee future results, the
high returns earned by diversi®ed US stock funds over
the past two years did not make investors nervous.
* Corresponding author. Tel.: +1-330-672-2426; fax: +1-
330-672-2448; e-mail: dindro@bsa3.kent.edu.
Group, says, ``People seem to have their foot to the
accelerator looking for maximum returns'' [8].
Existing studies found con¯icting evidence concern-
ing the persistence and predictability of mutual fund
performance [2, 4, 10, 14, 15, 17, 25]. Because these stu-
dies utilize linear models as the primary tools, they
may not be able to capture complexity in the data.
Moreover, although economic environment a€ects the
fund managers' performance, macroeconomic variables
are beyond their control. Given an economic environ-
ment, fund managers must therefore focus their atten-
tion on fund-speci®c characteristics that drive
performance. From an investor's perspective, consider-
ing that about 75±80% of professional money man-
agers do not beat the market index [8, 12], prediction
of mutual fund performance based on information

0305-0483/99/$ - see front matter # 1999 Elsevier Science Ltd. All rights reserved.
PII: S 0 3 0 5 - 0 4 8 3 ( 9 8 ) 0 0 0 4 8 - 6
374 D.C. Indro et al. / Omega, Int. J. Mgmt. Sci. 27 (1999) 373±380
about fund characteristics that can help him/her pick
winning funds is extremely valuable.
The current study addresses this issue by utilizing an
arti®cial neural network approach. It examines which
fund-speci®c characteristics are important performance
predictors, taking as given the environment in which
the fund operates. The research approach followed
here can be considered as an extension of Ref. [5],
however, di€ers from that of Ref. [5] on several
counts. First, unlike Ref. [5] that forecasts the fund's
net-asset value (NAV), this study attempts to predict
mutual fund performance, i.e. the fund's percentage
total return, at the end of the year. A fund's total
return is computed each month as the change in
monthly NAV plus the reinvestment of all income and
capital gains distributions during that month, and
divided by the NAV at the beginning of the month.
The monthly total returns are then compounded to
calculate the total return at the end of the year. Since
an investor is concerned with a fund's performance,
return is a more direct measure of performance than
NAV. Second, since this study is intended to help
investors identify which fund-speci®c characteristics
drive mutual fund performance, it concentrates on the
use of fund-speci®c characteristics, rather than macroe-
conomic variables, to predict mutual fund perform-
ance. Third, the database used in this study is di€erent
from that of Ref. [5]. The Morningstar Mutual Funds
On-Disc database provides numerous fund-speci®c
operating characteristics, performance as well as invest-
ment styles. Instead of treating all mutual funds as a
homogeneous group, we work with mutual fund of
three distinct investment styles: value, blend and
growth. Value funds seek to invest in undervalued
stocks, while growth funds invest in stocks that are
deemed to have good earnings growth potentials. A
blend fund mixes the value and growth styles. In con-
trast, Ref. [5] uses investment objectives (growth,
growth and income, balanced, etc.) to classify mutual
funds. Fourth, the computational methodology
adopted here di€ers from that used in Ref. [5]. Instead
of using the back-propagation method, this study uti-
lizes a general-purpose nonlinear optimizer, GRG2 [24],
which was recently proposed [22, 34] to train neural
networks. Fifth, this study also employs a neural net-
work backward-elimination procedure [21] to obtain a
parsimonious model for each of the three investment
styles.
Similar to Ref. [5], the neural network forecasting
results in this study are compared to those of linear
models by using several error performance measures.
Although many studies have shown the superiority of
neural network approach relative to discriminant
analysis, linear and nonlinear regression models as well
as other analytical techniques [9, 16, 27, 32, 33, 35, 36],
this study ®nds mixed evidence regarding the e€ective-
ness of neural network approach, relative to linear
models, to forecast mutual fund performance. The
neural network approach outperforms linear models
for growth and blend funds but is not necessarily su-
perior to linear models for forecasting the performance
of value funds.
This paper is organized as follows. Section 2 pro-
vides a brief description of the neural network
approach used for prediction purposes. Section 3
describes the mutual fund database as well as the pre-
dictive model used in this study. In addition, mutual
fund operating characteristics and performance, vari-
able selection criteria as well as the evaluation of the
neural network model performance are discussed.
Section 4 provides concluding remarks.
2. Arti®cial neural networks for nonlinear function
mappings
Arti®cial neural networks (ANNs), originally devel-
oped to mimic biological neural networks, the human
brain particularly, are composed of a number of inter-
connected simple processing elements called neurons or
nodes. Each node receives an input signal from other
nodes or external inputs and then after processing the
signals locally through a transfer function, it outputs a
transformed signal to other nodes or ®nal outputs.
ANNs are characterized by the network architecture,
that is, the number of layers, the number of nodes in
each layer and how the nodes are connected. In a pop-
ular form, multi-layer perceptron (MLP), all nodes
and layers are arranged in a feed-forward manner. The
®rst or the lowest layer is an input layer where external
information is received. The last or the highest layer is
an output layer where the network produces the model
solution. In between, there are one or more hidden
layers which are critical for ANNs to identify the com-
plex patterns in the data. All nodes in adjacent layers
are connected by acyclic arcs from a lower layer to a
higher layer. A multi-layer perceptron with one hidden
layer and one output node is the most commonly used
ANN structure for many real applications, and will be
used in this study.
Before an ANN can be used to perform any func-
tional mapping, it must be trained to do so. Network
training is an unconstrained nonlinear minimization
problem [22]. The most popular algorithm for training
is the well-known back-propagation [31] which is basi-
cally a gradient steepest descent method with constant
step size, although more advanced optimization
methods have been used for training neural
networks [1, 6, 29]. Hung and Denton [22] and
Subramanian and Hung [34] have proposed the use of
a general-purpose nonlinear optimizer, GRG2 [24], in
training neural networks. The bene®ts of GRG2 have
 D.C. Indro et al. / Omega, Int. J. Mgmt. Sci. 27 (1999) 373±380
been reported in the literature for many classi®cation
problems [26, 30, 34]. This study uses a GRG2 based
system to train neural networks.
Neural networks are powerful forecasting tools
which can perform complex function mapping. Unlike
linear regression analysis which is limited to the linear
function mappings, neural networks are able to dis-
cover complex nonlinear relationships in the data. The
issue remaining is whether neural networks can provide
accurate estimates or a good approximation to the
underlying function. This is resolved by the pioneering
work in neural network research [7, 13, 18±20] which
shows that a feed-forward neural network with only
one hidden layer can approximate any continuous
function with arbitrarily desired accuracy given enough
hidden nodes used.
The very limited success in forecasting mutual fund
performance with linear speci®cation, as well as the
promising results of ANN application to ®nancial
data, motivate us to compare and contrast the predict-
ability of each type of model on mutual fund perform-
ance. Because a neural network approach does not
require a prespeci®ed functional form and is more ¯ex-
ible than linear models, forecasting mutual fund per-
formance with a neural network approach may
generate better results.
3. Mutual fund data and predictive model
3.1. Sample selection and variable de®nition
This study utilizes the Morningstar Mutual Funds
On-Disc database over a three-year time period, 1993±
1995. The CD-ROM database, which was started in
1992, contains end-of-the-year fund-speci®c infor-
mation which allows us to identify a fund's investment
style, risk and return statistics, as well as other operat-
ing characteristics1.
Among all the equity mutual funds, three investment
styles are examined: value, blend and growth. To be
included in the sample, each fund must have a com-
1 mutual fund, he/she can only have access to the fund's
Brown et al. [3] show that predictability of funds may be
increased due to the exclusion of failed funds. The data set
from Morningstar is certainly not free of survivorship bias.
However, since the emphasis of the current study is to com-
pare the predictability of neural network with linear models,
the comparison is justi®ed as long as the impact of bias is
similar on both types of models.
2
An alternative to Jensen's ALPHA is an ALPHA from a
multi-index model (see [11] for a fuller discussion).
3
The di€erence in the number of funds in the training and
test sets is due to the presence of new funds that did not exist
in the training sample set.
375
plete set of operating characteristics that are necessary
to construct the predictive model. The variables of
interest, as described below, are:
X1 = The fund's ®ve-year annualized % return
(RETURN), measured as of the end of each year
for 1993±1995.
X2 = TURNOVER of the fund's portfolio,
measured as the smaller of the fund's purchases or
sales (excluding all securities with maturity less than
one year) divided by its average monthly assets.
X3 = Price±earnings (P/E) ratio, measured by the
weighted average ratio of the price-earnings per
share of the stocks in a fund's portfolio.
X4 = Price±book (P/B) ratio, measured by the
weighted average ratio of the price±book value per
share of the stocks in a fund's portfolio.
X5 = Median market capitalization (MCAP),
measured by the median market capitalization value
(share price multiplied by the number of shares out-
standing, in million dollars) of the stocks in a
fund's portfolio.
X6 = Percentage of cash (%CASH), measured by
the value of cash and cash-equivalent holdings in
proportion to other assets in a fund's portfolio.
X7 = Percentage of stock (%STOCK), measured
by the value of stock holding in proportion to other
assets in a fund's portfolio.
These explanatory variables are then used to predict
the mutual fund performance, which is measured by
the fund's risk-adjusted % return known as Jensen's
ALPHA [23]2 and is computed as:
ALPHAjt ˆ Rjt ÿ Rft ÿ bjt ‰Rmt ÿ Rft Š …1†
where Rjt is the fund's (unadjusted) annual return in
year t, Rft is the annual return of the 90-day Treasury
bills in year t, bjt is the fund's average systematic risk
over the last three years and Rmt is the annual return
on the S&P 500 index in year t. A fund's performance
is considered superior if its ALPHA is positive.
When an individual is considering investing in a
operating characteristics at the beginning of the period.
Thus, the 1994 ALPHA and 1993 explanatory vari-
ables of each fund are used in the training set. The test
set employs the 1995 ALPHA and 1994 explanatory
variables. A total of 438 (559) equity mutual funds
with complete operating characteristics are used in the
training (test) set3. In the training set, there are 152
value, 181 blend and 105 growth funds. The number of
value, blend and growth funds in the test set is 206,
211 and 142, respectively.
376 D.C. Indro et al. / Omega, Int. J. Mgmt. Sci. 27 (1999) 373±380

Table 1
Summary statistics

Variables Mean Standard deviation Maximum Minimum

(A) Value
RETURN (%) 10.14 3.82 26.59 ÿ6.71
TURNOVER (%) 56.84 44.89 265.00 2.00
P/E 17.28 3.25 34.13 5.88
P/B 2.37 0.44 3.80 0.43
MCAP (in US$million) 5079.17 4220.98 28585.00 16.00
% CASH 8.83 9.22 73.00 ÿ10.60
% STOCK 75.89 25.65 103.50 0.00
ALPHA (%) 4.01 4.94 28.54 ÿ19.25

(B) Blend
RETURN (%) 10.25 3.58 28.24 ÿ6.70
TURNOVER (%) 68.46 41.13 47.50 0.00
P/E 21.16 3.66 47.66 14.38
P/B 3.49 0.58 5.48 1.88
MCAP (in US$million) 8217.94 6139.24 38803.00 202.00
% CASH 7.49 9.60 100.00 ÿ10.60
% STOCK 83.42 19.19 110.60 0.00
ALPHA (%) 1.43 4.34 25.11 ÿ10.40

(C) Growth
RETURN (%) 12.57 6.50 28.30 ÿ19.73
TURNOVER (%) 97.08 112.02 969.00 0.00
P/E 28.99 5.97 53.43 19.00
P/B 5.00 4.20 10.97 2.34
MCAP (in US$million) 4599.98 6529.65 40078.00 209.00
% CASH 8.45 8.81 60.00 ÿ4.80
% STOCK 87.18 16.44 102.80 0.40
ALPHA (%) 3.44 7.23 22.64 ÿ24.51

3.2. Mutual fund operating characteristics and
performance
Summary statistics pertaining to each investment
style are shown in Table 1. Over the sample period,
value (blend) funds produced the highest (lowest) risk-
adjusted performance, on average, as indicated by
ALPHA. Note that the (unadjusted) ®ve-year annual-
ized return of the growth funds is higher than that of
the value funds. The (unadjusted) ®ve-year annualized
return of blend funds is, on average, slightly higher
4
The neural networks employed in this study are feed-for-
ward networks with one hidden layer. There are seven input
nodes corresponding to the number of independent variables
and there is one output node corresponding to the dependent
variable. The optimal architecture for each style (the number
of hidden nodes) is chosen such that the sum of squared error
(SSE) in the test set is minimized. A network with 12 hidden
nodes is chosen for value funds. Similarly, networks with 9
and 10 hidden nodes are chosen for blend and growth, re-
spectively.
than that of the value funds, blend funds' ALPHA is
approximately 2.5% lower than the ALPHA of value
funds. This result implies that blend funds look more
like growth than value funds in terms of risk.
3.3. Comparisons of ANN and linear models for
predicting mutual fund performance
To assess the relative performance of the ANN
approach4 and linear models, four summary error
measures: mean error (ME), mean absolute deviation
(MAD), standard deviation of the error (STDEV) and
the mean absolute percentage error (MAPE) are com-
puted. The last, MAPE, allows comparability with
Ref. [5]. Both ME and MAD are measures of unbia-
sedness of the predictions. MAD, a modi®ed mean
error measure, rules out the possibility that large errors
of opposite signs could cancel out in a ME measure.
STDEV gauges the eciency of the estimates, that is,
how widely the forecast errors are dispersed. The dis-
tinctive feature of MAPE is that the error terms are
standardized to facilitate comparisons across variables
with di€erent scales.
 D.C. Indro et al. / Omega, Int. J. Mgmt. Sci. 27 (1999) 373±380 377

Table 2
Comparisons of `error' measurement: ANN versus linear models

Error measure ANN Linear model ANN Linear model

Training (N = 152) Testing (N = 206)

(A) Value
ME 0.01 0.00 ÿ 0.56 ÿ0.49
MAD 2.04 2.27 2.39 2.35
STDEV 1.58 1.75 2.13 2.16
MAPE 2.28 2.54 2.12 2.09

Training (N = 181) Testing (N = 211)

(B) Blend
ME 0.00 0.00 ÿ 0.26 ÿ0.16
MAD 1.53 1.63 1.60 1.60
STDEV 1.35 1.54 1.44 1.49
MAPE 1.09 1.16 1.38 1.51

Training (N = 105) Testing (N = 142)

(C) Growth
ME 0.01 0.00 2.60 4.04
MAD 2.53 2.78 4.30 4.91
STDEV 2.20 2.40 3.68 3.92
MAPE 5.11 5.63 4.88 5.56

Table 2 provides a performance comparison between
the ANN and linear regressions for the three styles.
For the three training data sets, neural network predic-
tions are better than those of the linear regressions,
regardless of the error measures used. However, look-
ing at the test data, the results are mixed. For value
funds, the ME values for the neural network are worse
than those of the linear model while the MAD,
STDEV and MAPE measures indicate that ANN
results are roughly the same as those of the linear
model with ANN being slightly worse. For blend
funds, the ME of ANN is almost twice as large as the
ME of the linear model. However, the other three
error measures (MAD, STDEV and MAPE) all show
that ANN models outperform the linear models. For
growth funds, neural networks are clearly better than
the linear model by all four measures. Note also that
in all three styles, the STDEV for neural networks is
smaller than that of linear models. This indicates that
for a given sample size, neural network predictions are
relatively more ecient than those of linear models.
In general, our forecasting results con®rm the ®nd-
ings in Ref. [5] that ANN outperforms linear models.
Speci®cally, using the MAPE measure, a comparison
between our Table 2 (testing set) and Table 3 in
Ref. [5] reveals the following observations. First, with
the exception of bond fund, Ref. [5] shows that ANN
outperforms the linear model. Our Table 2 shows that
ANN also outperforms linear model for blend and
growth funds. However, ANN and the linear model
provide virtually similar results for value funds.
Second, ANN generates higher forecast errors for
growth funds (the most aggressive funds) than the less
aggressive funds in Ref. [5]. Similarly, our forecasting
results indicate that ANN generates greater forecast
errors for growth funds than those for value and blend
funds. Third, in terms of the magnitude of MAPE,
Ref. [5] generates forecast errors of 10.56%, while our
results show much smaller forecasting errors (4.88%)
for growth funds.
The di€erence in these results may be attributed to
three factors. First, our study uses a data set that is
di€erent from that used in Ref. [5]. Second, the back-
propagation method was used in Ref. [5], while our
study uses the GRG2 approach. Third, our study uses
fund-speci®c operating characteristics to forecast
mutual fund performance, while Ref. [5] uses general
macroeconomic variables to forecast the funds' net
asset value (NAV). Even though the fund's NAV is
a€ected by general macroeconomic variables, the per-
formance of a particular mutual fund relative to the
market will be more directly a€ected by how the fund
is managed. That is, a fund's operating characteristics:
the stock selection strategy, the intensity to trade
stocks in the portfolio, and the relative degree of
defensiveness, will signi®cantly in¯uence its operating
378 D.C. Indro et al. / Omega, Int. J. Mgmt. Sci. 27 (1999) 373±380

Table 3
Comparisons of reduced models

Error measure NNR LRR1 LRR2 NNR LRR1 LRR2

Training (N = 152) Testing (N = 206)

(A) Value, NNR = {X1, X3, X4}; LRR1 = {X1, X3, X4, X5, X7}; LRR2 = {X1, X3, X4}
ME 0.00 0.00 0.00 ÿ0.71 ÿ 0.48 ÿ0.50
MAD 2.29 2.28 2.41 2.23 2.30 2.15
STDEV 1.73 1.76 1.81 2.03 2.19 2.09
MAPE 2.56 2.95 2.83 2.01 2.17 2.03

Training (N = 181) Testing (N = 211)

(B) Blend, NNR = {X1, X7}; LRR1 = {X1, X5, X6, X7}; LRR2 = {X1, X7}
ME 0.00 0.00 0.00 ÿ0.21 ÿ 0.48 ÿ0.32
MAD 1.61 1.63 1.72 1.57 1.55 1.55
STDEV 1.55 1.55 1.57 1.44 1.51 1.46
MAPE 1.15 1.37 1.34 1.05 1.27 1.12

Training (N = 105) Testing (N = 142)

(C) Growth, NNR = {X1, X3, X4}; LRR1 = {X2, X3, X5}; LRR2 = {X1, X3, X4}
ME 0.00 0.00 0.00 3.74 5.11 4.31
MAD 2.67 2.87 2.90 4.42 5.71 4.76
STDEV 2.70 2.40 2.84 5.12 4.23 3.97
MAPE 5.41 5.81 5.87 5.02 6.48 5.41

performance. From that perspective, it is not surprising
that our forecasting results have smaller forecast errors
than those of Ref. [5].
3.4. Variable selection and comparisons of reduced
models
Since Ref. [5] does not address parsimonious model-
ing issue, our forecasting results in this section are not
directly comparable to those of Ref. [5]. However, as
in all modeling exercises, parsimony is an important
issue. We ®rst discuss variable selection and then com-
pare the forecasting results of the reduced models
(ANN versus linear).
We determine the best set of variables to be used in
neural networks for the prediction of ALPHA through
backward stepwise elimination method. The variable
elimination criterion is based on an F-ratio. The F-
ratio has an F-distribution only if the errors are nor-
mally distributed. There is no reason to believe that
this assumption holds in neural network models.
Therefore, deterministic rules for selecting the cuto€
point do not exist. On the other hand, the F-ratio sum-
marizes the contribution of an input variable to the
`goodness-of-®t' of a network. Hence, it seems like a
good measure for comparing the importance of vari-
ables even though the non-normality of the neural net-
work output prevents the use of F-ratio for
signi®cance testing. In this paper, a variable is elimi-
nated if its corresponding F-ratio is much lower than
the F-ratios of the other variables. Although there is
no guarantee that the best subset of variables will be
chosen, this backward elimination procedure provides
a good heuristic approach for variable selection. It is
interesting to note that the backward elimination pro-
cedure generates a set of variables for value and
growth funds which are generally consistent with the
®nance literature (P/E and P/B). However, because
blend funds are a mixture of value and growth funds,
the e€ects of P/E and P/B inherent in value and
growth funds may cancel out.
3.5. Forecasting results of reduced models
Given the reduced set of variables for each style,
Table 3 compares the relative performance of ANN
and two linear regression models based on di€erent
sets of variables. The NNR results are the neural net-
work results based on the ®nal reduced models. To
generate the reduced linear model LRR1, standard
backward elimination procedure in SAS was used to
choose the best set of fund-speci®c characteristics for
each investment style. The other linear model, LRR2,
uses the same set of fund-speci®c variables generated
by the neural networks reduced model.
 D.C. Indro et al. / Omega, Int. J. Mgmt. Sci. 27 (1999) 373±380
Comparing the reduced ANN model (NNR) and
LRR1 for the testing set, the following conclusions
emerge: (1) for value funds, the ANN approach is in-
ferior to the linear model in terms of the ME error
measure. However, the reduced ANN models show
better results when comparisons are made on MAD,
STDEV and MAPE; (2) for blend funds, NNR outper-
forms the linear model in terms of the ME, STDEV
and MAPE error measures and is slightly worse than
linear model based on MAD; (3) for growth funds,
NNR is better than the linear model in terms of the
ME, MAD and MAPE error measures. The only
exception is that STDEV under ANN is larger than
that of LRR1.
In order to control for the possible biases in com-
parison due to variable selection, we proceed to com-
pare the performance of ANN and linear models
which include the same set of variables used in ANN
(LRR2). The results based on comparisons of NNR
and LRR2 are consistent with that of NNR and
LRR1 with one exception, i.e. for value funds, MAD
of LRR2 turns out to be smaller. Overall, the results
in Table 3 suggest that the ANN approach is not uni-
versally superior to linear models for predicting mutual
fund performance. The ANN approach is superior to
linear models considered here for growth and blend
funds, but not for value funds.
In general, the forecasting results from the parsimo-
nious ANN model con®rm the ®ndings that ANN out-
performs linear models. Note, however, that relative to
the full ANN model, the reduced ANN model pro-
duces better forecasting results for value and blend
funds (based on three of the four error measures), but
not for growth funds.
4. Conclusion
This study utilized an ANN approach and GRG2
general nonlinear optimizer to forecast the perform-
ance of three di€erent investment styles typically fol-
lowed by equity mutual funds. Speci®cally, the
investment styles examined are value, blend and
growth. The neural networks employed here are feed-
forward networks with one hidden layer, seven input
nodes corresponding to the number of independent
variables and one output node corresponding to the
dependent variable. In addition, backward elimination
procedure was used to obtain a parsimonious model.
Morningstar Mutual Funds On-Disc database over
the 1993±1995 period was used to identify a fund's
operating characteristics and historical performance.
The neural networks forecast results were then com-
pared to those generated by linear models by using
alternative error performance measures that capture
unbiasedness and eciency. The results suggest that
379
whether the neural network approach is superior to
linear models for predicting mutual fund performance
depends on the style of the fund. Speci®cally, linear
models are better than the neural network approach
for the value funds, but the neural network model out-
performs the linear models in forecasting the perform-
ance of growth and blend funds.
This study is just a beginning to explore the use of
nonlinear models, such as the neural networks, to
identify factors that drive mutual fund performance. It
would be interesting to combine the features of both
the current and the Chiang et al. [5] to better under-
stand the performance of fund managers under di€er-
ent economic environments. Such an approach requires
the use of macroeconomic variables, employed in
Ref. [5], as well as fund-speci®c operating character-
istics, utilized in this study. With longer time-series,
one can examine performance persistence under di€er-
ent economic conditions. More interestingly, such a
study will help answer how a fund manager alters his/
her fund-speci®c operating characteristics in response
to changing economic environment in order to gener-
ate performance persistence (either good or bad).
Acknowledgements
Preliminary results of this paper were presented at
the Spring 1996 National Meeting of the INFORMS
in Washington, D.C. We are grateful to Michael Y.
Hu, three anonymous referees and the editor, George
Mitchell, for comments and suggestions. Any errors
are our sole responsibility.
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