Can Mutual Fund “Stars” Really Pick Stocks.pdfVIP

THE JOURNAL OF FINANCE • VOL. LXI, NO. 6 • DECEMBER 2006 Can Mutual Fund “Stars” Really Pick Stocks? New Evidence from a Bootstrap Analysis ROBERT KOSOWSKI, ALLAN TIMMERMANN, RUSS WERMERS, and HAL WHITE∗ 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. WAS PETER LYNCH , FORMER MANAGER of the Fidelity Magellan fund, a “star” stock- picker, or was he simply endowed with stellar luck? The popular press seems to assume that Mr. Lynch’s fund performed well due to his unusual acumen in identifying underpriced stocks. In addition, Marcus (1990) concludes that the prolonged superior performance of the Magellan fund is difficult to explain as a purely random outcome, that is, where Mr. Lynch and the other Magellan man- agers have no true stockpicking skills and are merely the luckiest of a large group of fund managers. More recently, the Schroder Ultra Fund topped the field of 6,000 funds (across all investment objective categories) with a return of 107% per year over the 3 years ending in 2001. This fund closed to new in- vestors in 1998 due to overwhelming demand, presumably because investors credited the fund manager with having extraordinary skills. Recent research documents