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On luck versus skill when performance benchmarks are style-consistent

Mason, A, Agyei-Ampomah, S, Clare, A and Thomas, S (2015) On luck versus skill when performance benchmarks are style-consistent Journal of Banking & Finance, 59 (Octobe). pp. 127-145.

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We firmly believe that style-appropriate, investible benchmarks not only provide a more parsimonious way of describing manager performance, but also better aligns performance evaluation with the real world performance targets of fund managers’. It is against such benchmarks that managers should be judged. With this principle foremost in our approach, we use style-consistent benchmarks to determine whether any observed alpha produced by a sample of U.S. equity funds is due to skill or to luck. We find that different segments of the market, ranging from large-cap growth to small-cap value, exhibit different levels of skill and luck. Our results also show that the use of standard multi-factor models underestimates managerial ability and overstates the proportion of funds whose abnormal performance can be attributed to chance rather than to skill, when compared against the use of style-consistent practitioner benchmarks. We also find that a single factor performance evaluation model that uses Russell Style indices consistent with the style orientation of a fund and market practice provides a parsimonious way of accounting for fund performance. Finally, our findings should be of particular relevance in mutual fund markets where the risk factors commonly used in the academic literature to evaluate manager performance – SMB, B/M, MOM and others – are not readily available.

Item Type: Article
Divisions : Faculty of Arts and Social Sciences > Surrey Business School
Authors :
Mason, A
Agyei-Ampomah, S
Clare, A
Thomas, S
Date : October 2015
DOI : 10.1016/j.jbankfin.2015.05.013
Uncontrolled Keywords : Mutual fund performance; Style benchmarks; Skill versus luck
Additional Information : © Elsevier 2015. This manuscript version is made available under the CC-BY-NC-ND 4.0 license
Depositing User : Symplectic Elements
Date Deposited : 18 Aug 2015 08:56
Last Modified : 01 Apr 2017 02:08

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