Measuring Fund Managers’ Fundamental Stock-Picking Skill with AFP
Summary
The article explains Active Fundamental Performance (AFP), a measure intended to identify mutual fund managers who select stocks well on fundamental information. For each fund, it computes the covariance between benchmark-adjusted portfolio weights, or changes in those weights, and the subsequent stock returns around earnings announcements. The short event window is chosen because prices are argued to reflect company fundamentals more clearly then. Index-based AFP captures active holdings relative to a benchmark; trade-based AFP captures portfolio adjustments.
The source summarizes evidence from 2,538 actively managed US equity funds over 1984–2014. It reports that AFP predicts future fund performance and adds information beyond several established performance and holdings measures, with results persisting under risk and fund-characteristic controls. It also finds stronger predictive power for stocks with greater information asymmetry and some persistence in fund AFP. These are historical findings from a specific sample and methodology; the article notes that replacing announcement-window returns with full-quarter returns removes AFP’s predictive ability, and the results are not investment advice.
Key ideas
- AFP relates active portfolio weights or weight changes to stock performance around earnings announcements.
- The method uses announcement-window returns because they may contain a clearer signal about company fundamentals.
- In the studied US fund sample, AFP predicted future performance beyond several established measures.
- AFP’s predictive relation was stronger for stocks with greater information asymmetry.
- The findings depend on the event-window approach and historical sample used in the study.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.