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Can Mutual Fund “Stars” Really Pick Stocks? New Evidence from a Bootstrap Analysis

Authors


  • Kosowski is from Imperial College (London), Timmermann and White are from the University of California, San Diego, and Wermers is from the University of Maryland at College Park. We thank an anonymous referee for many insightful comments. Also, we thank Wayne Ferson, Will Goetzmann, Rick Green, Andrew Metrick, and participants at the 2001 CEPR/JFI “Institutional Investors and Financial Markets: New Frontiers” symposium at INSEAD (especially Peter Bossaerts, the discussant), the 2001 European meeting of the Financial Management Association in Paris (especially Matt Morey, the discussant), the 2001 Western Finance Association annual meetings in Tucson, Arizona (especially David Hsieh, the discussant), the 2002 American Finance Association annual meetings in Atlanta, Georgia (especially Kent Daniel, the discussant), the Empirical Finance Conference at the London School of Economics (especially Greg Connor, the discussant), and workshop participants at the University of California (San Diego), Humboldt-Universität zu Berlin, Imperial College (London), and the University of Pennsylvania.

ABSTRACT

We apply a new bootstrap statistical technique to examine the performance of the U.S. open-end, domestic equity mutual fund industry over the 1975 to 2002 period. A bootstrap approach is necessary because the cross section of mutual fund alphas has a complex nonnormal distribution due to heterogeneous risk-taking by funds as well as nonnormalities in individual fund alpha distributions. Our bootstrap approach uncovers findings that differ from many past studies. Specifically, we find that a sizable minority of managers pick stocks well enough to more than cover their costs. Moreover, the superior alphas of these managers persist.

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