Portfolios of Actively Managed Mutual Funds
57 Pages Posted: 20 Sep 2019 Last revised: 14 Nov 2020
Date Written: November 13, 2020
Investors should focus on the performance of portfolios of active funds, not on the performance of individual active funds. Taking this portfolio approach with respect to active U.S. equity mutual funds, I build an optimized portfolio of funds that subsequently has low idiosyncratic volatility and a large, positive, statistically significant alpha. Consistent with a Berk and Green (2004) equilibrium, that outperformance is short lived if the optimized portfolio is not rebalanced often, as investors allocate substantial capital—in excess of that expected based on past performance—to the funds with a large weight in the optimized portfolio.
Keywords: active management, alpha, mutual fund, portfolio
JEL Classification: G11, G14, G23
Suggested Citation: Suggested Citation