U.S. Mutual Fund Performance: Skill or Luck?

Abstract

This thesis examines the performance of 1704 actively managed U.S. open-end, domestic equity mutual funds in the period of January 1995 to December 2017. Regression results for an equal-weighted portfolio suggest that fund managers in aggregate do not possess sufficient skill to cover their costs. We use a bootstrap procedure to distinguish skill from luck in the cross-section of three-factor t(α) estimates for net and gross fund returns. The bootstrap results show that a sizeable minority of fund managers do have sufficient skill to cover their costs. The evidence of skill is stronger when examining performance gross of management fees. Under the assumption that the cross-section of true α has a normal distribution with mean zero and standard deviation σ, we inject α into fund returns in the bootstrap simulations. We find that the σ for the left tail is about 0.75% a year, while the right tail is about 1.25%.