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Rekenthaler Report

Yes, Mutual Fund Managers Do Have Skill

A fat lot of good that does them.

Hopes and Prayers
A Bloomberg editor alerted me to an academic paper that takes a new angle on measuring investment-manager skill. Rather than compare an entire fund's performance to that of a benchmark, Roberto Stein in "Are mutual fund managers good gamblers?" looked only at a sliver of stock-fund portfolios. Within that sliver, he found, professional mutual fund managers are highly successful.

To explain: Following a predecessor's lead, Stein identified a subgroup of the U.S. equity markets that he terms "lottery stocks." Such issues are those with relatively low stock prices, high idiosyncratic risk, and high idiosyncratic skewness. In plainer English, those stocks are the investment version of lottery tickets, because they don't cost much and have a potentially high payoff. They behave very differently from the overall market, and extremely at that.