Using Public-Information Sensitivity to Assess Fund Manager Skill
Summary
The document summarizes a study that proposes a public-information reliance (RPI) measure as a way to assess active equity fund managers. It estimates how much changes in a fund’s stock holdings can be explained by changes in sell-side analyst recommendations; the measure is essentially the regression’s unadjusted R-squared. The underlying idea is that managers with stronger private information or research skill may respond less to public analyst signals.
Tests on U.S. active equity funds compare RPI with future returns adjusted using factor models and holdings-based attribution, and also examine investor fund flows. Lower RPI is associated with better future performance and stock-selection or style-selection contributions, rather than market-timing ability. The reported relationships persist after controls and several robustness checks, while higher RPI is associated with greater fund risk. The measure does not reveal what private information managers possess, depends on detailed holdings and analyst data, and is calculated at discrete intervals. The evidence is observational and drawn from a particular historical fund sample.
Key ideas
- RPI measures how closely fund holding changes track changes in public analyst recommendations.
- The study interprets lower RPI as a possible signal of stronger manager skill or private information.
- Lower-RPI funds show stronger future risk-adjusted performance in the reported tests.
- Holdings-based results attribute the association to stock and style selection rather than market timing.
- RPI is data-intensive and does not identify the information managers may possess.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.