Abstract
In this paper we examine whether Parnassus Workplace fund delivers superior return despite it restrictive screening based on workplace environment. We use bootstrap method to evaluate the financial performance of the fund. This bootstrap allows us to distinguish skill from luck. The distribution of the actual t(α) and the simulated t(α) are compared to infer whether the actual distribution is generated by mere luck or whether some manager exhibits skill. Our results indicate that the fund exhibits stock selection skills. The t-statistic of the actual estimated alpha is more extreme than the simulated t-statistic of alpha and as such the fund exhibits skill. The fact that PARWX beats the simulations does suggest that by picking the right funds, investors can outperform the market.
Highlights
We live in a digital age where tremendous amount of information is available to almost everybody on almost everything including mutual funds
It is impossible to tell how high the probability of luck is in good performance of a mutual fund manager
This paper separates skill from luck in managers’ investment performance using a Carhart four-factor model and applies latest bootstrapping simulations methodology to distinguish skill from luck. This bootstrap approach is necessary because of non-normalities in individual fund alpha distributions. Using this bootstrap technique we examine the performance of Parnassus Workplace Fund over the May 2005 through June 2012 period
Summary
We live in a digital age where tremendous amount of information is available to almost everybody on almost everything including mutual funds. Record on the consistency of mutual fund performance is mixed. It is impossible to tell how high the probability of luck is in good performance of a mutual fund manager. A number of advanced investors might even require that a mutual fund be evaluated by a pre-specified four factor conventional performance benchmark comprised of the three Fama-French factors and a momentum factor. They might want to look at the investment process and see whether it is consistent with results and repeatable over time. Make it possible to analyze the performance of actively managed mutual funds Some recent studies such as Kosowski et al (2006), Fama and French (2010), etc. make it possible to analyze the performance of actively managed mutual funds
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