The win–loss ratio as an ability signal of mutual fund managers: a measure that is less influenced by luck

To better identify skilled mutual fund managers, we develop a mutual fund performance predictor that is less influenced by luck. We posit that it is unlikely for a fund manager to consistently hold numerous above median performing stocks unless he has stock-picking ability. Using the number of above...

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Bibliographic Details
Published in:Financial markets and portfolio management 2015-11, Vol.29 (4), p.301-335
Main Authors: Chung, Y. Peter, Kim, Thomas
Format: Article
Language:English
Subjects:
Business and Management
Expected returns
Finance
Investment advisors
Investors
Management
Mutual funds
Portfolio performance
Rates of return
Securities trading
Skills
Stocks
Studies
Time series
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Summary:To better identify skilled mutual fund managers, we develop a mutual fund performance predictor that is less influenced by luck. We posit that it is unlikely for a fund manager to consistently hold numerous above median performing stocks unless he has stock-picking ability. Using the number of above median performing stocks as a fund performance predictor (win–loss ratio), we find that a higher win–loss ratio in 1 year is associated with 2–4 % additional risk-adjusted return in the next. The ratio also has an economically and statistically significant predictive power after controlling for other fund performance predictors in the literature.
ISSN:1934-4554
2373-8529
DOI:10.1007/s11408-015-0255-3