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.
mutual funds, persistence, industry selection
Finance and Financial Management
Review of Asset Pricing Studies
Oxford University Press
BUSSE, Jeffrey A. and TONG, Qing.
Mutual Fund Industry Selection and Persistence. (2012). Review of Asset Pricing Studies. 2, (2), 245-274. Research Collection Lee Kong Chian School Of Business.
Available at: http://ink.library.smu.edu.sg/lkcsb_research/2956