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Fund Management Skill, Investor Sentiment, and Noise Trading

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Summary

This article reviews an empirical study of whether skilled active equity fund managers perform differently when investor sentiment and noise trading are elevated. Using US domestic active equity mutual funds from 2002 to 2014, the study estimates rolling risk-adjusted returns and measures fund value added using abnormal returns scaled by fund assets. It ranks funds by skill and past performance, compares portfolios across sentiment, market dispersion, and economic conditions, and checks the findings with alternative sentiment measures.

The reported results associate higher measured skill with stronger performance. High-skill funds fare relatively better during high-sentiment periods, when noisy trading may make mispricing harder to interpret; performance differences also appear during periods of greater stock return dispersion and economic expansion. The authors report robustness to controls and alternative sentiment indicators. These findings are evidence from a particular US sample and study design, not a guarantee that skill can be identified in advance or that the same relationships apply in other markets. The document also notes that some portfolio estimates are statistically insignificant.

Key ideas

  • The study measures fund skill with a value-added-based skill ratio and uses rolling regressions to estimate abnormal returns.
  • Higher-skill funds are associated with stronger performance than lower-skill funds in the sample.
  • High-skill managers perform relatively better during high investor sentiment periods, despite weaker overall fund performance in those conditions.
  • The analysis also considers stock return dispersion and economic conditions as influences on active management results.
  • Alternative sentiment measures support the reported pattern, but the evidence is specific to the US sample and includes statistically insignificant estimates.

Tags

EquitiesFactor investingSentimentStatisticsRisk management

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