Mutual Fund Industry Selection and Persistence

• Main Authors: BUSSE, Jeffrey A., TONG, Qing
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2012
• Subjects: mutual funds; persistence; industry selection; Finance and Financial Management
• Online Access: https://ink.library.smu.edu.sg/lkcsb_research/2956; https://ink.library.smu.edu.sg/context/lkcsb_research/article/3955/viewcontent/MutualFundIndustrySelectionPersistence_2012_afv.pdf
• Institution: Singapore Management University

We analyze mutual fund industry selectivity — the performance of a fund’s industry allocation relative to the market. We find that industry selection accounts for a full third of fund performance based on two-digit SIC codes, with the remaining attributable to the performance of individual stocks relative to their own industries. We find that industry-selection skill drives persistence in relative performance, particularly over longer investment horizons. Unlike individual-stock-selection ability, industry selectivity is not eroded by increasing fund assets. Our results suggest that accounting for a manager’s ability to pick outperforming industries provides information beyond standard performance measures that can enhance a fund investor’s future performance.