Working Paper: CEPR ID: DP3717
Authors: Randolph Cohen; Joshua Coval; Lubos Pstor
Abstract: We develop a performance evaluation approach in which a fund manager's skill is judged by the extent to which his investment decisions resemble the decisions of managers with distinguished performance records. The proposed performance measures are estimated more precisely than standard measures, because they use historical returns and holdings of many funds to evaluate the performance of a single fund. According to one of our measures, funds with significantly positive ability considerably outnumber funds with significantly negative ability at the end of our sample. Simulations demonstrate that our measures are particularly useful in ranking managers. In an application that relies on such ranking, we find only weak persistence in the performance of US equity funds after accounting for momentum in stock returns.
Keywords: mutual funds; performance evaluation; persistence
JEL Codes: G10
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| fund manager's investment decisions (G11) | performance of other successful managers (M54) |
| similarity of investment decisions (G11) | evaluation of skill (C52) |
| portfolio resemblance to successful managers (G11) | assessment of fund manager's skill (G11) |
| similarity in portfolio weights (G11) | influence on perceived skill (C92) |
| recent trades alignment with successful managers (G11) | assessment of manager's skill (M54) |
| concurrent trading activities of successful managers (G14) | evaluation of skill (C52) |
| use of performance measures (L25) | identification of skilled fund managers (G11) |
| performance persistence (C41) | evidence of weak persistence (C41) |