Mutual Fund Screening versus Weighting
104 Pages Posted: 15 May 2018 Last revised: 19 Apr 2019
Date Written: March 30, 2019
This paper develops a holdings-based measure of fund performance that distinguishes how fund managers weight stocks in their portfolios and how the managers screen the stocks they choose to hold. I find that screening decisions contribute negatively to the performance of a typical fund whereas portfolio weighting decisions contribute positively. In particular, screening decisions lower fund performance by 0.40% per year before costs whereas weighting decisions increase performance by 0.72% per year for a typical fund during 1980-2016. Even though the managers possess weighting ability, which in isolation suggests a skill of a manager, when I also consider the ability to pick which stocks to hold, the managerial skill is no longer present. My results also suggest that fund managers could improve their performance by following a benchmark closer in terms of holdings but not in terms of weights.
Keywords: Mutual Fund, Screening, Weighting
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