Managerial Activeness and Mutual Fund Performance

A closet indexer is more likely to meet a value-weighted investment benchmark by value weighting the portfolio. Following this intuition, we introduce a simple measure of active management, the absolute difference between the value weights and actual weights held by a fund, summed across its holdings. This proxy captures managerial skill: active funds outperform passive ones by 2.5% annually. Compared with known measures of skill, our proxy robustly predicts fund flows, asset growth, factor-adjusted performance, and value added. Its predictive ability is orthogonal to that of other measures and is robust to controlling for volatility timing, past performance, and style. (JEL G10, G12, G14, G20, G23) An important long-standing question in financial economics is whether active mutual fund managers possess skills to beat their benchmarks. The answer to this question is crucial for steering the asset allocation decisions of investors, guiding investment strategies of money managers, and evaluating market efficiency. The resounding evidence that an average actively managed equity mutual fund underperforms the benchmark 1 and the declining costs of passive investments have contributed to the ongoing shift by investors into