DP3717 Judging Fund Managers by the Company They Keep

Author(s): Randolph Cohen, Joshua Coval, Lubos Pástor
Publication Date: January 2003
Keyword(s): mutual funds, performance evaluation, persistence
JEL(s): G10
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=3717

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.