DP11896 Picking Funds with Confidence

Author(s): Niels Groenborg, Asger Lunde, Allan G Timmermann, Russ Wermers
Publication Date: March 2017
Keyword(s): equity mutual funds, Fund confidence set, risk-adjusted performance
JEL(s): G11, G17, G2
Programme Areas: Financial Economics
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=11896

We present a new approach to selecting active mutual funds that uses both holdings and return information to eliminate funds with predicted inferior performance through a sequence of pair-wise comparisons. Our methodology determines both the number of skilled funds and their identity; funds identified ex-ante as being superior earn substantially higher risk-adjusted returns than top funds identified by conventional alpha ranking methods. Importantly, we find strong evidence of variation in the breadth of the set of funds identified as superior, as well as fluctuations in the style and industry exposures of such funds over time and across different volatility states