Copyright
by
Chester Lewis Wilson
2006 The Dissertation Committee for Chester Lewis Wilson
certifies that this is the approved version of the following dissertation:
Evaluation and Comparison of Management Strategies
by Data Envelopment Analysis with an Application to Mutual Funds Committee:
Chester Lewis Wilson, B. A.

Dissertation
Presented to the Faculty of the Graduate School of
the University of Texas at Austin
in Partial Fulfillment
of the Requirements
for the Degree of
Doctor of Philosophy
The University of Texas at Austin
May 2006
UMI Number: 3245797
3245797
2007
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incentive for me. His perspicacity over such a broad range of endeavors and his sure
ethical judgment are not often equaled. His guidance in the more practical aspects of
completing this work was also decisive.
I have been fortunate to study with some of the most intellectually creative and

vi
morally upright mentors of our time, and among their first rank is Dr. Cooper. He
continues to surprise me with what he has done in theory, practice, and public service and
with his constant and easy flow of ideas. His guidance has always been so rich with
insight that I continue to gain from it even long after it has been offered. He gives
unstintingly to those with whom he works, and we are all enriched by his kindness and
generosity.
Finally, I am happy to acknowledge my first obligation in graduate study, to Dr.
Abraham Charnes. Dr. Charnes also was a man of brilliant mind and firm principle. He
and Dr. Cooper were long time collaborators and they produced an immense body of
work which has served greatly to advance the human effort of understanding and
improving the world. They have left the only durable monuments, if there be any in this
universe, as have all the members of my committee, both through a body of work which
contributes to the achievement of humankind and through the living legacy of the
students and colleagues whom they have trained and guided to carry on the same
tradition.
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investment management.
The methodology to exploit the declared strategies and performance data of mutual
funds is Data Envelopment Analysis (DEA), a nonparametric linear programming
method of analysis for use with empirical data. By producing a piecewise linear frontier
based on the Pareto-Koopmans efficient performers, DEA provides a basis for measuring
performances and facilitates sensitivity analysis. Data Envelopment Analysis measures
assume no prior, underlying functional form (such as regression equations or production
functions) to relate input to output or to other variables.
An evaluation of a selected group of mutual funds illustrates the general DEA
method and evaluates the actual performance of the funds. Then a new application
involving an extended, three-stage Data Envelopment Analysis separates the performance
of the investment strategies from the effects of managerial shortcomings and abilities to
implement the strategies. This makes it possible to separately identify and evaluate what
a strategy can accomplish. It also makes it possible to evaluate separately short-run from

ix
long-run performance. Finally, DEA identifies benchmarking possibilities for removing
these short-run deficiencies.
This new method for evaluating strategies and shortcomings in performance is
demonstrated by application to mutual funds, which display striking contrasts in
managerial performance and strategic potential. Although demonstrated with mutual
funds, this method is not restricted to such applications. Indeed, the methods in this
thesis provide a new way of evaluating investment potentials by distinguishing between
actual short-run performance and long-run potentials. x
Table of Contents
List of Tables
List of Figures

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72

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80
84
98
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Chapter 5 Methodology for Evaluation of Strategies by Data Envelopment
Analysis
Section 1 Introduction
Section 2 Early Definitions of Economic Efficiency
Section 3 Data Envelopment Analysis
Section 4 BCC Mathematical Model
Section 5 Mann-Whitney Rank Analysis
Section 6 Comparison of Strategies
Chapter 6 Analysis and Results
Section 1 Data Source, Population, Variables, Software
Section 2 Standard Data Envelopment Analysis of Mutual Funds from
Both Strategy Groups Evaluated Together

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214 xii
Chapter 7 Conclusions, Limitations, and Future Research
Section 1 Contributions and Limitations
Section 2 Further Directions
Appendix Table A1 Morningstar Definitions of Variables
Appendix Table A2 Descriptive Statistics of Input Variables
Appendix Table A3 Descriptive Statistics of Output Variables
Appendix Table A4 Correlations among Input and Output Variables
Appendix Table A5 Morningstar Prospectus Strategy Categories
Appendix Table A6 Aggressive Growth Sample Fund Data
Appendix Table A7 Equity Income Sample Fund Data
Appendix Table A8 Ranked Total Annual Return 1997 and Mean-Variance
Characteristics
Appendix Table A9 Ranked 3-Year Annualized Total Return and Mean-
Variance Characteristics
Appendix Table A10 Ranked 5-Year Annualized Total Return and Mean-
Variance Characteristics

Sets of Inefficient Funds, (Funds which Appear in the Reference Set
of More Than One Inefficient Fund) Step Three, DEA of Strategy
Category Exemplars
Table A16: Comparison of Extent to Which Efficient Equity Income Funds
Appear in the Envelopment Form Reference Sets of Inefficient Funds,
(Funds which Appear in the Reference Set of Only One Inefficient
Fund) Step Three, DEA of Strategy Category Exemplars
Table A17: Summary Comparison of Extent to Which Efficient Aggressive
Growth Funds Appear in the Envelopment Form Reference Sets of
Inefficient Funds, (Funds which Appear in the Reference Set of More
Than One Inefficient Fund) Step Three, DEA of Strategy Category
Exemplars
Bibliography
Vita

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298
xiv
List of Tables
Chapter 3 Mutual Funds Industry
Table 1.1 Annual Sizes of Mutual Fund Industry, 1940-2004: Number
of Funds, Total Net Assets, Number of Shareholder Accounts
Chapter 6 Results of Comparison of Mutual Fund Strategies
69

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Table 6.11 Comparison between Strategy Categories Based on
Summary Statistics of the Projection Values, Differences between
Projection and Observation Values, and Differences as Percentage
Changes, for Outputs, Based on Result from the Step Three DEA
Strategies Evaluation
Table 6.12 Comparison between Strategy Categories Based on
Summary Statistics of the Projection Values, Differences between
Projection and Observation Values, and Differences as Percentage
Changes, for Outputs, Based on Result from the Step Three DEA
Strategies Evaluation
Table 6.13 Ranks and Associated Data for Funds Which Exhibit

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242

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Appendix Table A7: Equity Income Sample Fund Data
Appendix Table A8: Ranked Total Annual Return 1997 and Mean-Variance
Characteristics
Appendix Table A9: Ranked 3-Year Annualized Total Return and Mean-
Variance Characteristics
Appendix Table A10: Ranked 5-Year Annualized Total Return and Mean-
Variance Characteristics
Appendix Table A11: Aggressive Growth Funds with Efficiency Projected
Data and Summary Statistics
Appendix Table A12: Equity Income Funds with Efficiency Projected Data
and Summary Statistics
Appendix Table A13: Aggressive Growth Funds Summary Statistics of
Changes between Original Observations and Efficiency Projected
Data
Appendix Table A14: Equity Income Funds Summary Statistics of Changes
between Original Observations and Efficiency Projected Data
Appendix Table A15: Summary Comparison of Extent to Which Efficient
Equity Income Funds Appear in the Envelopment Form Reference
Sets of Inefficient Funds, (Funds which Appear in the Reference Set
of More Than One Inefficient Fund) Step Three, DEA of Strategy
Category Exemplars
Table A16: Comparison of Extent to Which Efficient Equity Income Funds
Appear in the Envelopment Form Reference Sets of Inefficient Funds,
(Funds which Appear in the Reference Set of Only One Inefficient

Hypothetical One-output/One-input Frontiers which Represent
Separate Strategies and the Projection of Strategy Inefficient
Funds to the Strategies-Efficient Frontier 126
144
151
158
1
Chapter 1 Introduction
Section 1 Overview
Strategy signifies the intended course and directions by which actions are guided
to their ends, aspirations piloted to attainment. Because strategic management concerns
the fundamental organization, direction, and production of economic and social activity,
its study can have profound and far-reaching consequences for human welfare. It is,
therefore, worthy of serious and exacting scholarly investigation. This dissertation
undertakes to offer contributions in four areas related to strategic management: (1) a new
conceptual framework; (2) a new method of analysis; (3) the identification of an
important industry (mutual funds) wherein strategic choice is publicly declared; and (4)
an application of these elements to the evaluation of the strategies of a high risk and a
low risk sector of this industry.
To begin, the foundation of a categorical schema or conceptual framework is
developed for the fundamental concepts and basic factors of strategic management. This
framework is based on identifying and analyzing the essential meaning of the idea of
strategy which can thus distinguish and disentangle it from the other, related, basic
concepts in this area of management. A review of the origins and uses of the term

3
concept of strategy with a computationally tractable methodology for the empirical
evaluation of its full potential can make strategic management research more germane to
managers charged with executing strategies and to directors to whom they report.
Furthermore, separating the potential of strategies from the variations in their
implementation clarifies the performance of management. By controlling for the effect
of the strategy which managers are responsible for executing, evaluations of management
activity against the standard of strategic potential are relevant, meaningful, and
efficacious. The complementary nature of strategy and implementation is especially
evident in those situations where an excellent strategy poorly implemented is overcome
by the effective implementation of a mediocre one. An evaluation which distinguishes
strategy from implementation is relevant both for managers monitoring their own
progress and for those who need to appraise management performance.
For issues of strategic management, in particular, such analyses can separate the
potential of the strategy from the effectiveness of management efforts to realize its goals.
This is of especial importance to strategic management since the purpose of strategy is to
produce desired results in practice. The issues—the tasks, means, and problems—of the
implementation of strategy are necessarily as consequential as those of strategy
formulation, and, indeed, more urgent because of the high rate and great costs of strategic
failure in corporate practice. Since strategic issues concern fundamental questions of the
business firm, the response to such issues will have a substantial impact on the firm’s
value, perhaps even its existence. The costs of failure are significant for all stakeholders.
For large enterprises, success or failure in strategic implementation can have effects

4
throughout the economy.
As in any developing science, the data accumulate and concepts and theories
evolve over time with experience and practice. Economics and management science
have been compared to geology, astronomy, or evolutionary biology—as distinct from
physics or chemistry—because of their retrospective character and predominant reliance

can be compared. Exhaustive evaluation of each separate aspect of performance in this
industry is greatly facilitated by the fact of publicly declared and legally binding
strategies for its firms and by the public reporting of detailed and standardized financial
information.
The results strikingly demonstrate an unambiguous difference between the
strategies compared. The analysis also provides specific guidance for the evaluation of
the managers of the various funds and grounds for differentials in performance-based
consequences, especially remuneration. However, the analysis also has an unexpected
consequence for shareholder consideration, since the results can be interpreted as another
kind of portfolio evaluation, with implications for shareholder investment decisions.
Finally, since the number of strategies evaluated, the number of variables in the

6
model, and the time period of the evaluation are all of limited scope, this investigation
may be regarded the initial steps in a new way to study and evaluate strategies. The last
section explores several major directions for extending the research in the future.
Section 2 Plan of Presentation
The first task is to set out and elucidate the key issues of strategic management,
which are the definition of strategy and the evaluation of management performance with
respect to strategy. Chapter 2 begins the investigation with a view to recasting some of
the fundamental concepts which have been employed in the strategic management
literature. The focus in this reformulation is the concept and definition of strategy, which
serves as the organizing principle for the overall management of action directed to a
specifiable end. Discussions of meaning can become abstruse, especially in clarifying a
concept about which there is so much confusion, disagreement, and uncertainty. The
notion of strategy has many uses and formulations; it lies at the center of complex
relations and processes; it balances constancy in goal seeking against a context of change;
it guides the pursuit of a future whose attainment is not just uncertain, but often unlikely,
without the exertions prescribed, at least implicitly, by the strategy. These considerations
motivate two approaches in the next chapter in pursuit of the material and concrete