Author (Your Name)

Michael Aquino, Colby College

Date of Award


Document Type

Honors Thesis (Colby Access Only)


Colby College. Economics Dept.


Randy A. Nelson


This study attempts to determine the degree to which the state of the macroeconomy can be used to create a mutual fund investment strategy that consistently outperforms the S&P 500. By quantifying how systematic economic factors affect the relative performance of different fund strategies against the market, an informed investor can select the fund strategy that will outperform the S&P 500 given both the current and predicted states of the macroeconomy. Linear regression models were estimated for nine different fund strategies to approximate how each macroeconomic variable affects a fund's performance against the S&P 500. Monthly returns for 1,360 mutual funds over a twenty year period were collected to conduct the analysis. A complete procedure along with two separate decision rules was subsequently created to provide an investment platform derived from the regressions results. Stage one of the procedure requires an investor to forecast the future state of the macroeconomy. It is assumed that only two types of investors exist, naive or advanced, who employ different tools in accomplishing this task. In stage two, both investors place their forecasted values into the nine regressions to determine which fund strategy will yield the greatest level of outperformance. In stage three, the investor switches his entire position to a fund which invests using that strategy. To test the performance of this procedure, the decision rules were back tested both statically and in real-time over the twenty year period. The results indicate that while the mutual fund investment strategy does not provide consistent outperformance, it does yield considerable gains in the long run.


Full-text download restricted to Colby College campus only.


Mutual funds, Investment analysis, Stock price forecasting, Business cycles, economic forecasting