Expected Mutual Fund Performance

43 Pages Posted: 10 Feb 2020 Last revised: 25 Mar 2020

See all articles by Magnus Dahlquist

Magnus Dahlquist

Stockholm School of Economics; Swedish House of Finance

Markus Ibert

Board of Governors of the Federal Reserve System; Swedish House of Finance

Felix Wilke

Stockholm School of Economics; Swedish House of Finance

Date Written: March 23, 2020

Abstract

We use forward-looking Morningstar Analyst Ratings to infer a distribution of expected abnormal returns (alphas) for mutual funds. We benchmark analysts' expectations against expectations obtained from an estimation of a rational model of fund performance. Compared with the rational learner, we find a larger dispersion in analysts' expectations, that analysts' expectations increase less with perceived managerial skill, and that analysts' expectations increase --- as opposed to decrease --- with fund size. The median industry alpha is negative, whereas the value-weighted alpha is positive, indicating that analysts believe that the industry is too large in terms of the number of funds but too small in terms of total assets.

Keywords: Alpha, expectations formation, value added

JEL Classification: G11, G12, G14, G23

Suggested Citation

Dahlquist, Magnus and Ibert, Markus and Wilke, Felix, Expected Mutual Fund Performance (March 23, 2020). Swedish House of Finance Research Paper No. 20-4. Available at SSRN: https://ssrn.com/abstract=3531272 or http://dx.doi.org/10.2139/ssrn.3531272

Magnus Dahlquist

Stockholm School of Economics ( email )

Drottninggatan 98
Stockholm, SE-111 60
Sweden

Swedish House of Finance ( email )

Drottninggatan 98
111 60 Stockholm
Sweden

Markus Ibert (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Swedish House of Finance ( email )

Drottninggatan 98
Stockholm, 11160
Sweden

Felix Wilke

Stockholm School of Economics ( email )

Drottninggatan 98
111 60 Stockholm
Sweden

Swedish House of Finance ( email )

Drottninggatan 98
111 60 Stockholm
Sweden

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