Returns to Specialization : Evidence from Health Mutual Fund Managers

We investigate the benefits of specialized knowledge in generating superior performance in the asset management industry. We compare the returns of health sector mutual fund managers with prior health-related education or experience (specialists) to those without such a background (generalists). Specialists outperform generalists by 4.7% per year in annualized net returns, and up to 7.8% per year after adjusting for risk and controlling for observable fund and manager characteristics. We also find evidence of differences in anticipating major medical-related events, as specialists reduce holdings of stocks prior to Food and Drug Administration (FDA) drug rejections. The paper provides new evidence on the competitive advantages that can be used to generate true alpha