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Active Technological Similarity and Mutual Fund Performance

Published online by Cambridge University Press:  02 November 2021

Ping McLemore
Affiliation:
Federal Reserve Bank of Richmond [email protected]
Richard Sias*
Affiliation:
University of Arizona Eller College of Management
Chi Wan
Affiliation:
University of Massachusetts Boston College of Management [email protected]
H. Zafer Yüksel
Affiliation:
University of Rhode Island, College of Business [email protected]
*
[email protected] (corresponding author)

Abstract

We examine whether superior understanding of technological innovation is a source of mutual fund managers’ ability to garner positive abnormal returns. Consistent with our hypothesis, the inter-quintile annual net Carhart alpha spread for mutual funds sorted on changes in the technological similarity (TS) of their portfolio holdings is 282 basis points. Moreover, because changes in TS are largely orthogonal to other predictors of mutual fund success (e.g., industry concentration, active share, fund R2, and lag fund alpha), changes in TS can be combined with other measures to help identify the best performing funds.

Type
Research Article
Copyright
© The Author(s), 2021. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

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Footnotes

The authors thank Hendrik Bessembinder (the editor), Ruslan Goyenko (the referee), and participants at the 2020 Financial Management Association Annual Meeting. The views expressed herein are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of Richmond or the Federal Reserve System. All errors are our own.

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