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When fund management skill is more valuable?

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  • Feng Dong
  • John A. Doukas

Abstract

Does fund management skill allow managers to identify mispriced securities more accurately and thereby make better portfolio choices resulting in superior fund performance when noise trading – a natural setting to detect skill – is more prevalent? We find skilled fund managers with superior past performance to generate persistent excess risk‐adjusted returns and experience significant capital inflows, especially in high sentiment times, high stock dispersion, and economic expansion states when price signals are noisier. This pattern persists after we control for lucky bias, using the ‘false discovery rate’ approach, which permits disentangling manager ‘skill’ from ‘luck.’

Suggested Citation

  • Feng Dong & John A. Doukas, 2020. "When fund management skill is more valuable?," European Financial Management, European Financial Management Association, vol. 26(2), pages 455-502, March.
    • Handle: RePEc:bla:eufman:v:26:y:2020:i:2:p:455-502
    DOI: 10.1111/eufm.12234
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