Measuring Skill in the Mutual Fund Industry
44 Pages Posted: 11 Apr 2012 Last revised: 11 Aug 2020
Date Written: August 14, 2014
Using the value that a mutual fund extracts from capital markets as the measure of skill, we find that the average mutual fund has used this skill to generate about $3.2 million per year. We document large cross-sectional differences in skill that persist for as long as 10 years. We further document that investors recognize this skill and reward it by investing more capital with better funds. Better funds earn higher aggregate fees, and there is a strong positive correlation between current compensation and future performance. The cross-sectional distribution of managerial skill is predominantly reflected in the cross-sectional distribution of fund size rather than gross alpha.
Keywords: Mutual Funds, Skill, Compensation
JEL Classification: G2, J31
Suggested Citation: Suggested Citation