Skill and Value Creation in the Mutual Fund Industry

48 Pages Posted: 31 Oct 2018 Last revised: 25 May 2019

See all articles by Laurent Barras

Laurent Barras

McGill University - Desautels Faculty of Management

Patrick Gagliardini

USI Università della Svizzera italiana; Swiss Finance Institute

O. Scaillet

University of Geneva GSEM and GFRI; Swiss Finance Institute; University of Geneva - Research Center for Statistics

Date Written: May 9, 2019

Abstract

We develop a simple, nonparametric approach for estimating the entire distribution of skill. Our approach avoids the challenge of correctly specifying the distribution, and accommodates the need to study both the investment and trading dimensions of skill. Our results show that most funds are skilled at detecting profitable trades, but unskilled at overriding capacity constraints. Aggregating both skill dimensions, we find overwhelming evidence that mutual funds produce significant value added. In addition, the active industry is (i) not concentrated because few funds are skilled on all dimensions, (ii) close to optimally sized as funds internalize the impact of capacity constraints, and (iii) in a strong bargaining position vis-a-vis the investors.

Keywords: Mutual fund skill, non-parametric density estimation, large panel

JEL Classification: G11, G12, C14, C33, C58

Suggested Citation

Barras, Laurent and Gagliardini, Patrick and Scaillet, Olivier, Skill and Value Creation in the Mutual Fund Industry (May 9, 2019). Swiss Finance Institute Research Paper No. 18-66. Available at SSRN: https://ssrn.com/abstract=3269995 or http://dx.doi.org/10.2139/ssrn.3269995

Laurent Barras (Contact Author)

McGill University - Desautels Faculty of Management ( email )

1001 Sherbrooke St. West
Montreal, Quebec H3A1G5 H3A 2M1
Canada
+15143988862 (Phone)

Patrick Gagliardini

USI Università della Svizzera italiana ( email )

Via Buffi 13
Lugano, TN 6900
Switzerland

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Olivier Scaillet

University of Geneva GSEM and GFRI ( email )

40 Boulevard du Pont d'Arve
Geneva 4, 1211
Switzerland
+ 41 22 379 88 16 (Phone)
+41 22 389 81 04 (Fax)

HOME PAGE: http://www.scaillet.ch

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

University of Geneva - Research Center for Statistics

Geneva
Switzerland

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