Mutual Fund Screening Versus Weighting

Roman Skripnik

Finance, 2023, vol. 44, issue 1, 64-102

Abstract: This paper develops a holdings-based measure of fund performance that distinguishes how fund managers weight stocks in their portfolios from how they screen the stocks they choose to hold. I define screening as the decision to hold different stocks than in the fund?s benchmark (remove benchmark stocks or add stocks from outside the benchmark), and weighting as the decision to apply different weights than in the benchmark. I find that screening decisions contribute negatively, whereas weighting decisions contribute positively towards the performance of a typical fund during 1980-2016. In particular, screening decisions lower fund performance by 0.40% per year before costs, whereas weighting decisions increase performance by 0.72% per year before costs. Even though the managers possess weighting ability, which in isolation suggests skill, when I also consider the ability to pick which stocks to hold, the skill becomes insignificant.

Date: 2023
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