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Measuring investment skills of fund managers

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  • Choong Tze Chua
  • Winston Koh

Abstract

This article concerns the measurement of the investment skills of fund managers. A method is proposed that allows for a measurement and comparison of fund managers' performance across time and asset portfolios. The measure, the 'Excess Sharpe Ratio' (ESR) involves the construction of an appropriate benchmark for each fund manager, and then computing the difference between the Sharpe ratio of the manager and that of the benchmark. This procedure allows for a consistent measure of a manager's investment performance with respect to the relevant asset classes that the manager can invest in at any point in time. Using this measure, it is possible to detect significant persistence of managerial skills of up to 11 years. Also, new light is shed on the relationship of expenses to gross returns-even though firms with higher expenses have higher average gross returns, they in fact achieve this through higher risk-taking. Therefore, their ESR scores and Sharpe ratios are lower than firms with lower expenses.

Suggested Citation

  • Choong Tze Chua & Winston Koh, 2007. "Measuring investment skills of fund managers," Applied Financial Economics, Taylor & Francis Journals, vol. 17(16), pages 1359-1368.
    • Handle: RePEc:taf:apfiec:v:17:y:2007:i:16:p:1359-1368
    DOI: 10.1080/09603100500447586
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    1. Fernando Gómez-Bezares & Fernando R. Gómez-Bezares & David McMillan, 2015. "Don’t use quotients to calculate performance," Cogent Economics & Finance, Taylor & Francis Journals, vol. 3(1), pages 1065584-106, December.
    2. Fernando Gómez-Bezares & Fernando R. Gómez-Bezares, 2012. "Classic performance indexes revisited: axiomatic and applications," Applied Economics Letters, Taylor & Francis Journals, vol. 19(5), pages 467-470, March.

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