The Predictability of Managerial Heterogeneities in Mutual Funds

We empirically assess the role of managerial heterogeneities in mutual fund performance. Using a sample of Chinese mutual funds with relatively high managerial turnover rates, we follow the method in Abowd, Kramarz and Margolis (1999) to explicitly estimate the time-invariant heterogeneities among fund managers. We find that funds with higher manager fixed effects outperform those with lower manager fixed effects by 2% per year. We also find that fund performance improves after managers with higher fixed effects are hired. The results are consistent with the notion that manager fixed effects are associated with managerial innate ability or human capital, which in turn leads to better performance. Finally, we find that investors pay special attentions to these managerial attributes above and beyond the traditional performance measures, which provides some valid empirical evidence to the rational model of active portfolio management as in Berk and Green (2004)