Mutual Fund Performance: Skill or Luck?
Journal of Empirical Finance, 2008, Vol. 15, Issue 4, pp. 613-634.
48 Pages Posted: 15 Feb 2005 Last revised: 27 May 2013
Date Written: February 15, 2005
Using a comprehensive data set on (surviving and non-surviving) UK mutual funds (April 1975 - December 2002), we use a bootstrap methodology to distinguish between 'skill' and 'luck' for individual funds. This methodology allows for non-normality in the idiosyncratic risks of the funds - a major issue when considering those funds which appear to be either very good performers or very bad performers, since these are the funds which investors are primarily interested in identifying. Our study points to the existence of genuine stock picking ability among a small number of top performing UK equity mutual funds (i.e. performance which is not solely due to good luck). At the negative end of the performance scale, our analysis strongly rejects the hypothesis that poor performing funds are merely unlucky. These funds demonstrate 'bad skill'. Recursive estimation and Kalman 'smoothed' coefficients indicate temporal stability in the performance alpha of winner and loser portfolios.
Keywords: Mutual fund performance, bootstrapping, fama-french model
JEL Classification: C15, G11
Suggested Citation: Suggested Citation