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Active Technological Similarity and Mutual Fund Performance

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Summary

The document summarizes research on whether actively managed equity funds earn stronger future returns when their trading increases the technological similarity of their holdings. It describes Active Technological Similarity (ATS), built from the overlap in portfolio companies’ patent distributions. The measure compares a fund’s realized technological similarity with the level that would have resulted had the fund not traded, distinguishing active portfolio changes from similarity already present in its holdings.

The reported analysis groups funds by ATS and estimates future performance using Carhart four-factor alphas, portfolio sorts, and cross-sectional regressions. Higher ATS is associated with better subsequent returns, and the relationship remains after controls for fund characteristics, past performance, industry concentration, active share, and factor-model R-squared. The summary reports that much of the association comes from trades that increase ATS, and that combining ATS with other fund measures improves separation of future performers.

The evidence is historical and based on U.S. active equity mutual funds and patent data. It supports an association, not proof that the measure causes outperformance or will generalize to other periods or markets.

Key ideas

  • ATS measures trading-driven changes in the similarity of portfolio companies’ patent distributions.
  • The study reports that funds with higher ATS subsequently earn stronger factor-adjusted returns.
  • The reported relationship persists after controls for several fund characteristics and performance measures.
  • Trades that increase ATS account for much of the reported association with future returns.
  • ATS combined with other fund indicators improves the separation of higher- and lower-performing funds in the study.
  • The findings are historical and do not establish causation or guarantee future performance.

Tags

EquitiesFactor investingStatisticsPortfolio constructionBacktesting

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.