Expectations of Active Mutual Fund Performance

68 Pages Posted: 23 Dec 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

Multiple version iconThere are 2 versions of this paper

Date Written: December 2020

Abstract

We recover a forward-looking distribution of expected abnormal returns (alphas) for active equity mutual funds from analyst ratings. Professional analysts believe that alphas are dispersed, that the average fund will underperform, and that the largest funds will outperform. We estimate a rational expectations learning model of fund performance and confront the model-implied expectations based on fund size, perceived skill, and fees with analysts' expectations. Analysts and the rational learner respond similarly to changes in perceived skill and fees, but in contrast to the rational learner, analysts do not believe in a negative impact of fund size on fund returns. The absence of such decreasing returns to scale in analysts' expectations and the presence thereof in actual fund returns make it difficult to reconcile analysts' expectations with rational expectations, but can help explain the size of the industry together with its poor performance.

JEL Classification: G11, G12, G14, G23

Suggested Citation

Dahlquist, Magnus and Ibert, Markus and Wilke, Felix, Expectations of Active Mutual Fund Performance (December 2020). CEPR Discussion Paper No. DP15548, Available at SSRN: https://ssrn.com/abstract=3753948

Magnus Dahlquist (Contact Author)

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

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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