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Mutual fund performance components: an application to asset allocation mutual funds

ABSTRACT While most of the mutual fund performance literature focuses on returns only, a recent strand examines the activity level of portfolio managers and how this activity affects portfolio performance. We add to this literature in two ways. First, we examine asset allocation mutual funds, noting there are few studies examining this type of fund. We note our method of examination can be modified for any type of fund. Second, we use a weight-based method that separates fund performance into components, one of which provides a new measure of manager activity. Because this new measure is a component of fund performance, the effect of manager activity on performance is explicit. While we find the average fund does not beat a lagged-weight benchmark, we do find the components explain performance differences among funds. We also find evidence that manager activity persists, meaning funds exhibiting greater activity in the past tend to do so in the future. This is important because it predicts which funds are likely to have more extreme performance in the future. Finally, we find evidence of persistence in predictive skill, but find that skill is not strong enough to produce persistence in fund performance.