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Judging Fund Managers by the Company They Keep





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    • Cohen and Coval are from the Harvard Business School. Pástor is from the Graduate School of Business at the University of Chicago, NBER, and CEPR. Research support from the Center for Research in Security Prices and the James S. Kemper Faculty Research Fund at the Graduate School of Business, University of Chicago, is gratefully acknowledged (Páastor). We thank Jonathan Berk, Jeff Busse, George Chacko, Aida Charoenrook, Mike Cooper, Roger Edelen, Gene Fama, Rick Green (editor), Owen Lamont, Rudi Schadt, Erik Sirri, Rob Stambaugh, Pietro Veronesi, Tuomo Vuolteenaho, Russ Wermers, Tong Yao, an anonymous referee, and seminar participants at the 2003 AIM Investment Center Conference on Mutual Funds at the University of Texas at Austin, the 2003 Western Finance Association Meetings, the 2004 Wharton Mutual Fund Conference, the 2004 Chicago Quantitative Alliance Conference, Arizona State University, Berkeley Program in Finance, Dartmouth College, Emory University, Harvard University, Indiana University, Michigan State University, Morningstar, Northwestern University, Purdue University, Thomson Financial, University of Chicago, University of Oregon, University of Pennsylvania, and Vanderbilt University for helpful comments. Huong Trieu provided excellent research assistance.


We develop a performance evaluation approach in which a fund manager's skill is judged by the extent to which the manager's investment decisions resemble the decisions of managers with distinguished performance records. The proposed performance measures use historical returns and holdings of many funds to evaluate the performance of a single fund. Simulations demonstrate that our measures are particularly useful in ranking managers. In an application that relies on such ranking, our measures reveal strong predictability in the returns of U.S. equity funds. Our measures provide information about future fund returns that is not contained in the standard measures.