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Do funds selected by managers’ skills perform better?

Author

Listed:
  • Chen, Yugang
  • Liu, Yu
  • Li, Mingsheng

Abstract

We construct a simple intuitive rating mechanism to evaluate stock picking and market timing skills of equity and hybrid equity fund managers in China. We find that both our skill-rated 5-star (SR-5S) fund and the Morningstar 5-star (MS-5S) fund portfolios outperform the market. The SR-5S fund portfolio outperforms its counterpart MS-5S portfolio in most situations, depending on whether portfolio performance is measured by the abnormal returns of the CAPM model, the Fama-French three-factor (FF3) model, the Carhart four-factor (CH4) model and the Fama-French five-factor (FF5) model. Both market timing skill and stock picking skill affect the performance difference between the SR-5S fund and MS-5S fund portfolios. Additionally, the departure of a SR-5S or MS-5S fund manager is associated with fund performance declines, and the declines in performance for SR-5S funds are generally larger than the declines for the MS-5S funds.

Suggested Citation

  • Chen, Yugang & Liu, Yu & Li, Mingsheng, 2021. "Do funds selected by managers’ skills perform better?," Research in International Business and Finance, Elsevier, vol. 56(C).
  • Handle: RePEc:eee:riibaf:v:56:y:2021:i:c:s0275531920309764
    DOI: 10.1016/j.ribaf.2020.101368
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