Performance Evaluation of Unit Trusts in UK Market

Abstract Because of the low risk and professional management, mutual funds have become one of the most popular types of investments for individuals. Since the 1960s, the evaluation of mutual fund performance has aroused great interests in academic researches. However, previous studies have shown that mutual funds often underperform. Therefore, in this dissertation, the situation in the UK market is selected to examine whether unit trusts can ‘beat’ the market in the past five-year period from December 2003 to December 2008. This study employs Jensen’s alpha, Sharpe’s ratio, and Treynor’s ratio to analyse the selectivity abilities of unit trusts. The results suggest that the UK unit trusts cannot beat the market and that the actively managed unit trusts do not have a superior performance to the passively managed ones. Consequently, based on previous researches, two main reasons are determined relating to why unit trusts underperform: liquidity risk and poor managerial investment choices