Good Luck, Bad Luck. Can Mutual Funds Really Pick Stocks?

27 Pages Posted: 15 Feb 2014

See all articles by Dries Heyman

Dries Heyman

Ghent University - Department of Financial Economics

Koen Inghelbrecht

Ghent University - Department of Economics

Stefaan Pauwels

Ghent University - Department of Financial Economics

Date Written: February 14, 2014

Abstract

The literature examining mutual fund performance is vast and researchers have studied the performance of professional money managers extensively, but there is still an ongoing debate whether or not mutual fund managers have stock picking skills. This article investigates the profitability of institutional trades using a unique dataset comprising the transactions executed by a sample of mutual funds during the years 2002-2007. We implement an innovative bootstrap technique to examine the non-normal distribution of our characteristics-based performance measure across the trades of mutual funds to precisely separate luck from skill. Moreover, we apply a new nonlinear technique based on cluster analysis to construct matching benchmark portfolios. Results indicate that, controlling for luck, a negligible minority of managers pick stocks well enough to beat the market. The underperformance of managers can mainly be attributed to ‘bad luck’, and not to the absence of genuine stock picking skills. Finally, funds trading in illiquid stocks with higher book-to-market ratio and smaller size perform better.

Keywords: Mutual funds, Transaction data, Performance evaluation, Bootstrap, Stock picking skills

JEL Classification: G11, G17, G23

Suggested Citation

Heyman, Dries and Inghelbrecht, Koen and Pauwels, Stefaan, Good Luck, Bad Luck. Can Mutual Funds Really Pick Stocks? (February 14, 2014). Available at SSRN: https://ssrn.com/abstract=2395955 or http://dx.doi.org/10.2139/ssrn.2395955

Dries Heyman

Ghent University - Department of Financial Economics ( email )

Ghent, 9000
Belgium
0032 (0)9 2645307 (Phone)
(0)9 2643577 (Fax)

Koen Inghelbrecht (Contact Author)

Ghent University - Department of Economics ( email )

Sint-Pietersplein 5
Ghent, B-9000
Belgium
+32 9 264 89 77 (Phone)

HOME PAGE: http://users.ugent.be/~kjinghel/

Stefaan Pauwels

Ghent University - Department of Financial Economics ( email )

Ghent, 9000
Belgium

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