Innovation in Mutual Fund Portfolios: Implications for Fund Alpha and Risk

61 Pages Posted: 16 Mar 2015

Date Written: March 13, 2015

Abstract

This study introduces a new measure of portfolio holdings that has power to explain future fund abnormal returns. This measure is defined as "return on portfolio innovation." It is constructed as the return on completely new portfolio positions that a fund has not held before. I evaluate the return on newly added positions because their performance can signal the quality of managerial effort. On average, a one-standard deviation increase in the return on innovation increases the Carhart (1997) four-factor fund alpha by approximately 0.34 to 0.52 percent per year. In addition, although overall fund performance is inversely related to future risk-taking, higher returns on innovation are associated with greater risk. The results have important implications for fund performance and manager behavior.

Suggested Citation

Lantushenko, Viktoriya, Innovation in Mutual Fund Portfolios: Implications for Fund Alpha and Risk (March 13, 2015). Available at SSRN: https://ssrn.com/abstract=2578324 or http://dx.doi.org/10.2139/ssrn.2578324

Viktoriya Lantushenko (Contact Author)

Saint Joseph's University ( email )

5600 City Avenue,
Philadelphia, PA 19131
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
96
Abstract Views
694
rank
391,026
PlumX Metrics