Most Popular ArticlesProfessor Finance, University of Denver
CEO & Director of Research, AthenaInvest, Inc.
May 26, 2009
Luckily, a number of promising approaches are able to select truly active managers who outperform. The “Active R2-R” approach, proposed by Amihud and Goyenko, is one such approach. At the beginning of each month, from January 1981 through January 2009, funds are sorted by trailing one year S&P 500 R2 and independently by the trailing one year return. The funds with the lowest quintile R2 and the highest quintile return are held for the subsequent month, thus avoiding a look-ahead bias. The compound monthly excess return is calculated using continuous, trailing monthly excess returns for all months in which the fund is designated Active R2- R. Slightly fewer than half of the funds are so designated at one time or another during the sample period, with such funds remaining Active R2-R an average of 11% of the months over which the fund exists. On average, 7% of funds are Active R2-R in any particular month.
Active R2-R performance is much better than that generated by the buy-and-hold approach, as is shown in Figure 3 below. The average compound monthly excess return increases from 50 basis points for fund years 1 through 5 to a very impressive 118 basis points for fund years 26 through 30. Furthermore, Figure 4 below shows the chance of beating the S&P 500 increases from 64% for fund years 1 through 5 to an astounding 84% for fund years 26 through 30. These results reveal superior average fund performance which improves with age. This latter result is consistent with the proposition that experienced managers are better stock pickers.
Display article as PDF for printing.
Would you like to send this article to a friend?
Remember, if you have a question or comment, send it to .
