Expected Mutual Fund Performance
43 Pages Posted: 10 Feb 2020 Last revised: 25 Mar 2020
Date Written: March 23, 2020
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
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