50 Pages Posted: 23 Mar 2009 Last revised: 21 Apr 2021
Date Written: April 21, 2021
We find that the stocks in which active mutual fund or hedge fund managers display the most conviction towards ex-ante, their “Best ideas,” outperform the market, as well as the other stocks in those managers' portfolios, by approximately 2.8 to 4.5 percent per year, depending on the benchmark employed. The vast majority of the other stocks managers hold do not exhibit significant outperformance. Thus, the organization of the money management industry appears to make it optimal for managers to introduce stocks into their portfolio that are not outperformers. We argue that investors would benefit if managers held more concentrated portfolios.
Keywords: mutual funds, managerial skill, market efficiency
JEL Classification: G11, G23
Suggested Citation: Suggested Citation