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Portfolios of actively managed mutual funds

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  • Timothy B. Riley

Abstract

Investors should focus on the performance of portfolios of active funds, not on the performance of individual active funds. Taking this portfolio approach with respect to active U.S. equity mutual funds, I build an optimized portfolio of funds that subsequently has low idiosyncratic volatility and a large, positive, statistically significant alpha. Consistent with a Berk and Green equilibrium, that outperformance is short lived if the optimized portfolio is not rebalanced often, as investors allocate substantial capital—in excess of that expected based on past performance—to the funds with a large weight in the optimized portfolio.

Suggested Citation

  • Timothy B. Riley, 2021. "Portfolios of actively managed mutual funds," The Financial Review, Eastern Finance Association, vol. 56(2), pages 205-230, May.
    • Handle: RePEc:bla:finrev:v:56:y:2021:i:2:p:205-230
    DOI: 10.1111/fire.12257
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    References listed on IDEAS

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    Cited by:

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    3. Adam L. Aiken & D. Eli Sherrill & Kate Upton, 2022. "Side‐by‐side management of mutual funds and actively managed exchange traded funds," The Financial Review, Eastern Finance Association, vol. 57(3), pages 533-557, August.
    4. Jonathan Fletcher & Elizabeth Littlejohn & Andrew Marshall, 2023. "Exploring the performance of US international bond mutual funds," The Financial Review, Eastern Finance Association, vol. 58(4), pages 765-782, November.
    5. Yi Jiang & Tingting Que & Miaomiao Yu, 2022. "Price asymmetries in the US airline industry," The Financial Review, Eastern Finance Association, vol. 57(4), pages 793-814, November.

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