Measuring Skill in the Mutual Fund Industry

44 Pages Posted: 11 Apr 2012 Last revised: 11 Aug 2020

See all articles by Jonathan Berk

Jonathan Berk

Stanford Graduate School of Business; National Bureau of Economic Research (NBER)

Jules H. van Binsbergen

University of Pennsylvania - The Wharton School; National Bureau of Economic Research (NBER)

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Date Written: August 14, 2014

Abstract

Using the value that a mutual fund extracts from capital markets as the measure of skill, we find that the average mutual fund has used this skill to generate about $3.2 million per year. We document large cross-sectional differences in skill that persist for as long as 10 years. We further document that investors recognize this skill and reward it by investing more capital with better funds. Better funds earn higher aggregate fees, and there is a strong positive correlation between current compensation and future performance. The cross-sectional distribution of managerial skill is predominantly reflected in the cross-sectional distribution of fund size rather than gross alpha.

Keywords: Mutual Funds, Skill, Compensation

JEL Classification: G2, J31

Suggested Citation

Berk, Jonathan B. and van Binsbergen, Jules H., Measuring Skill in the Mutual Fund Industry (August 14, 2014). Jacobs Levy Equity Management Center for Quantitative Financial Research Paper, Available at SSRN: https://ssrn.com/abstract=2038108 or http://dx.doi.org/10.2139/ssrn.2038108

Jonathan B. Berk

Stanford Graduate School of Business ( email )

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National Bureau of Economic Research (NBER) ( email )

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Jules H. Van Binsbergen (Contact Author)

University of Pennsylvania - The Wharton School ( email )

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National Bureau of Economic Research (NBER)

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HOME PAGE: http://www.nber.org/people/jules_vanbinsbergen

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