We propose a new measure of fund investment skill, active fund overpricing (AFO), encapsulating the fund's active share of investments, the direction of fund active bets with regard to mispriced stocks, and the dispersion of mispriced stocks in the fund's investment opportunity set. We find that fund activeness is not sufficient for outperformance: high (low) AFO funds taking active bets on the wrong (right) side of stock mispricing achieve inferior (superior) fund performance. However, high AFO funds receive higher flows during periods of high investor sentiment, when the performance-flow relation becomes weaker.
Bibliographical noteFunding Information:
History: Accepted by Karl Diether, finance. Funding: This work was supported by a National University of Singapore Academic Research Grant [AcRF Tier 1 Grant R-315-000-124-115] to A. Hameed. Supplemental Material: The internet appendix is available at https://doi.org/10.1287/mnsc.2019.3319.
© 2019 INFORMS
- Managerial skills
- Mutual funds