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Picking Funds with Confidence

Author

Listed:
  • Niels S. Grønborg

    (Aarhus University and CREATES)

  • Asger Lunde

    (Aarhus University and CREATES)

  • Allan Timmermann

    (University of California, San Diego and CREATES)

  • Russ Wermers

    (University of Maryland)

Abstract

We present a new approach to selecting active mutual funds that uses both portfolio holdings and fund return information to eliminate funds with predicted inferior performance through a sequence of pairwise fund comparisons. Our methodology determines both the number of skilled funds and their identities; funds identified as being superior earn substantially higher riskadjusted returns than top funds identified by conventional alpha ranking methods. Importantly, we find strong evidence of time-series variation in the number 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.

Suggested Citation

  • Niels S. Grønborg & Asger Lunde & Allan Timmermann & Russ Wermers, 2017. "Picking Funds with Confidence," CREATES Research Papers 2017-13, Department of Economics and Business Economics, Aarhus University.
    • Handle: RePEc:aah:create:2017-13
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    References listed on IDEAS

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    Cited by:

    1. Christiansen, Charlotte & Grønborg, Niels S. & Nielsen, Ole L., 2020. "Mutual fund selection for realistically short samples," Journal of Empirical Finance, Elsevier, vol. 55(C), pages 218-240.

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    More about this item

    Keywords

    Fund confidence set; Equity mutual funds; Risk-adjusted performance;
    All these keywords.

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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