Measuring Economic Rents in the Mutual Fund Industry
38 Pages Posted: 20 Mar 2012
Date Written: March 15, 2012
We introduce a new measure of active mutual fund manager skill that is based on the dollar-value a manager adds as opposed to the abnormal return he generates. We find that not only does skill exist (the average mutual fund manager adds over $1.5 million per year), but it is persistent, as far out as 10 years. We further document that investors recognize this skill and reward it by investing more capital with skilled managers. Not only are higher skilled managers paid more, but there is a strong positive correlation between current compensation and future performance. Finally, we find no evidence of a superstar effect - managers are compensated proportionately in the value they add.
Keywords: mutual funds, rents, compensation, performance
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