Abstract
This study uses monthly net return data on 27 actively managed faith based mutual funds and the latest Fama-French bootstrap methodology to distinguish between luck and skill of fund managers. The main benchmark of this study is the Carhart (1997) four-factor model. The evidence suggests that majority of fund managers do not have enough skill to produce expected benchmark-adjusted net returns that cover costs. By ranking funds on performance after costs, we find that the performance of the majority of funds can be attributed to "bad skill". The evidence is strongest in the top 95th percentile and above, and from the bottom 10th percentile and below.
Highlights
There has been a growing interest in faith-based organizations and faith-based-mutual funds but the literature on return performance of these mutual funds is sparse
Mutual fund performance is generally judged against a standard benchmark index
Active management of a mutual fund is pursued with the goal of outperforming a multi-factor benchmark index adjusting for a common set of risk factors
Summary
There has been a growing interest in faith-based organizations and faith-based-mutual funds but the literature on return performance of these mutual funds is sparse. Mutual fund performance is generally judged against a standard benchmark index. Outperformance (or a positive outcome) is generally associated with skill and underperformance (or a negative outcome) with bad skill. Active management of a mutual fund is pursued with the goal of outperforming a multi-factor benchmark index adjusting for a common set of risk factors. Studies of mutual fund performance indicate that actively managed funds tend to underperform similar passively managed funds that closely replicate the return performance of benchmark index. This is true both before management fees and after management fees (See Malkiel, 2012)
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