Measuring Investment Skills of Fund Managers

Publication Type

Journal Article

Publication Date

2007

Abstract

This article concerns the measurement of the investment skills of fund managers. A method is proposed that allows for a measurement and comparison of fund managers’ performance across time and asset portfolios. The measure, the ‘Excess Sharpe Ratio’ (ESR) involves the construction of an appropriate benchmark for each fund manager, and then computing the difference between the Sharpe ratio of the manager and that of the benchmark. This procedure allows for a consistent measure of a manager's investment performance with respect to the relevant asset classes that the manager can invest in at any point in time. Using this measure, it is possible to detect significant persistence of managerial skills of up to 11 years. Also, new light is shed on the relationship of expenses to gross returnsâ€even though firms with higher expenses have higher average gross returns, they in fact achieve this through higher risk-taking. Therefore, their ESR scores and Sharpe ratios are lower than firms with lower expenses.

Discipline

Finance and Financial Management | Portfolio and Security Analysis

Research Areas

Finance

Publication

Applied Financial Economics

Volume

17

Issue

16

First Page

1359

Last Page

1368

ISSN

0960-3107

Identifier

10.1080/09603100500447586

Publisher

Taylor and Francis

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