A Simple but Effective Way to Identify Persistent Performances Among Actively-managed Mutual Funds

Abstract

We show the number of stocks contributing to the overall performance of an actively managed mutual fund is related to the persistency of the fund performance. Among the funds that have similar risk-adjusted returns, the funds that rely on a few high return stocks underperform the funds that hold many above-median return stocks. The difference between two groups is as large as 8% annual risk-adjusted return empirically. This result holds throughout our sample period, and is not generated by survivorship bias, look-back bias, or fund expenses.

Keywords: Mutual Fund, Holdings Data, Luck vs. Skill, Performance evaluation, Skewness

JEL Classification: G10, G11, G23