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Picking funds with confidence

Author

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  • Grønborg, Niels S.
  • Lunde, Asger
  • Timmermann, Allan
  • Wermers, Russ

Abstract

We present a new approach to selecting actively managed mutual funds that uses both portfolio holdings and fund return information to eliminate funds with predicted inferior performance through a sequence of pairwise fund comparisons. Our methodology determines both the number of skilled funds and their identities, and locates funds with substantially higher risk-adjusted returns than those identified by conventional alpha-ranking methods. We find strong evidence of time-series variation in both the number of funds identified as superior using our approach, as well as in their performance across different economic states.

Suggested Citation

  • Grønborg, Niels S. & Lunde, Asger & Timmermann, Allan & Wermers, Russ, 2021. "Picking funds with confidence," Journal of Financial Economics, Elsevier, vol. 139(1), pages 1-28.
    • Handle: RePEc:eee:jfinec:v:139:y:2021:i:1:p:1-28
    DOI: 10.1016/j.jfineco.2020.07.003
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    Cited by:

    1. Christiansen, Charlotte & Grønborg, Niels S. & Nielsen, Ole L., 2020. "Mutual fund selection for realistically short samples," Journal of Empirical Finance, Elsevier, vol. 55(C), pages 218-240.

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    More about this item

    Keywords

    Fund confidence set; Equity mutual funds; Risk-adjusted performance;
    All these keywords.

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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