Measuring investment skills of fund managers

Authors: Chua, Choong Tze¹; Koh, Winston²

Source: Applied Financial Economics, Volume 17, Number 16, November 2007 , pp. 1359-1368(10)

Publisher: Routledge, part of the Taylor & Francis Group

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Abstract:

This article concerns the measurement of the investment skills of fund managers. A method is proposed that allows for a measurement and comparison of fund managers' performance across time and asset portfolios. The measure, the 'Excess Sharpe Ratio' (ESR) involves the construction of an appropriate benchmark for each fund manager, and then computing the difference between the Sharpe ratio of the manager and that of the benchmark. This procedure allows for a consistent measure of a manager's investment performance with respect to the relevant asset classes that the manager can invest in at any point in time. Using this measure, it is possible to detect significant persistence of managerial skills of up to 11 years. Also, new light is shed on the relationship of expenses to gross returns-even though firms with higher expenses have higher average gross returns, they in fact achieve this through higher risk-taking. Therefore, their ESR scores and Sharpe ratios are lower than firms with lower expenses.

Document Type: Research article

DOI: http://dx.doi.org/10.1080/09603100500447586

Affiliations: 1: Lee Kong Chian School of Business, Singapore Management University, 178899 Singapore 2: School of Economics and Social Sciences, Singapore Management University, 178903 Singapore

Publication date: 2007-11-01

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