Did Fund Managers Deliver Value During the Financial Crisis?

Abstract

This study provides evidence that individual investors are better off by investing through mutual funds run by skilled fund managers, who not only deliver higher risk-adjusted returns in normal times but also attain similar performance even during turbulent economic states, such as the 2007–2009 global financial crisis. Specifically, we show that, on average, fund managers with the highest skill (top 20%) added $6.877 million of value annually during the early crisis period and $4.065 million of value during the late crisis period, compared with $3.198 million gain realized during the entire sample period. Low-skill fund managers (bottom 20%), however, lost $0.844 million of value during the early crisis period and $5.323 million of value during the late crisis period.

TOPICS: Manager selection, wealth management, performance measurement

Key Findings

• • Active managed mutual funds with skilled managers can serve an important insurance and value generating function not only during normal times but also in extreme economic downturns.

• • Funds run by skilled managers experienced significant capital inflows during both the early and late stages of the financial crisis, whereas their low skilled counterparts incurred significant capital outflows.

• • Fund management skill persists at least 1 year during the whole financial crisis period.