Fund manager conviction and investment performance

Liang Jin, Richard Taffler, Arman Eshraghi and Onur Kemal Tosun

International Review of Financial Analysis, 2020, vol. 71, issue C

Abstract: This paper examines the role conviction plays in asset management and its relationship with investment returns. We measure the strength of fund manager conviction through a fund's Active Share, i.e., the extent to which an investment portfolio differs from its benchmark index. First, we show fund manager conviction increases following both superior and, surprisingly, inferior past performance, and more so among solo-managed than team-managed funds. Second, and more importantly, we find an inverse-U relationship between conviction and subsequent performance. High levels of conviction proxied by high Active Share are associated with lower future returns and greater fund risk. Our study also illustrates an asymmetric investor reaction to fund manager conviction in the form of higher (lower) fund inflows rewarding good performance by high (low) conviction managers, but no pronounced penalties for poor performance, ceteris paribus.

Keywords: Overconviction; Uncertainty; Active Share; Fund performance; Fund flows; Fund structure (search for similar items in EconPapers)
JEL-codes: G11 G23 G41 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:71:y:2020:i:c:s1057521920301940

DOI: 10.1016/j.irfa.2020.101550

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