The win–loss ratio as an ability signal of mutual fund managers: a measure that is less influenced by luck
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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.
KeywordsMutual funds Luck vs. skill Win–loss ratio Performance evaluation Holdings data
The authors appreciate the financial support from the A. Gary Anderson Graduate School of Management Summer Research Grants for this research. We thank Markus Schmid (the editor) and an anonymous referee. We have benefited from the comments and suggestions of Warren Bailey, Jun-Koo Kang, David Mayers, Rick Smith, and participants in the research seminars at UC Riverside (School of Business Administration and Economics Department), the 2011 Midwest Finance Association Annual Meeting, the 2013 European Finance Association Annual Meeting, the 2013 KCMI-KAFA Annual Joint Workshop, and the 2014 AFA Annual Meeting. This study began when Thomas Kim was at Owen Graduate School of Management, Vanderbilt University.
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