Active Sector Funds and Fund Manager Skill
Chen, Huangyu, and Dirk Hackbarth. "Active Sector Funds and Fund Manager Skill." The Journal of Portfolio Management 46, no. 8 (2020): 64-85. DOI: https://doi.org/10.3905/jpm.2020.1.172
Posted: 15 Aug 2018 Last revised: 8 Sep 2020
Date Written: November 17, 2019
Abstract
The authors investigate the performance of active sector funds whose potential outperformance
has not been exhausted entirely by decreasing returns to scale. The authors document that
despite good track records, most sector funds are relatively smaller than their equilibrium
fund sizes — at which they are expected to generate zero net alphas. In particular, from
1998 to 2016, a passive indexation strategy of actively managed sector funds earns an annual
benchmark-adjusted return of 5.70% and a monthly alpha of 27 basis points. Moreover, the
strategy’s outperformance is present in market downturns (i.e., resilient to tail risk) and robust
to change of rebalancing frequency and inclusion of expenses. Efficient diversification and
under-appreciated skill – illustrated by an alpha-arithmetic to guide similar strategies – explain
the strategy’s success.
Keywords: alpha, managerial skill, mutual funds, passive investing
JEL Classification: G11, G20, G23
Suggested Citation: Suggested Citation
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