Managerial Activeness and Mutual Fund Performance
Review of Asset Pricing Studies, Forthcoming
44 Pages Posted: 20 Apr 2014 Last revised: 9 May 2015
Date Written: May 7, 2015
A closet indexer is more likely to meet a value-weighted investment benchmark by value-weighting the portfolio. Following this intuition, we introduce a simple measure of active management, the absolute difference between the value weights and the actual weights held by a fund, averaged across its holdings. This proxy captures managerial skill: Active funds outperform passive ones by 2.5% annually. Compared to known measures of skill, our proxy robustly predicts fund flows, asset growth, factor-adjusted performance, and value added. Its predictive ability is orthogonal to that of other measures and is robust to controlling for volatility timing, past performance, and style.
Keywords: Mutual fund performance, Portfolio management, closet indexing
JEL Classification: G10, G12, G14, G20, G23
Suggested Citation: Suggested Citation