Measuring the Skill of Mutual Funds. An Exploration of Skill Measure for Young and Old Mutual Funds

The new valued added measure of mutual fund skill introduced by Berk and Binsbergen (2015) opened new opportunities for the investigation of the mutual fund industry. This paper extends the methodology of Berk and Binsbergen (2015) by considering the effect of market size magnification. The use of this modification allows us to compare the skills of mutual funds in different periods and receive less market-dependent results of the investigation. I found that after 2011 the average mutual fund destroys $2.86 million annually after the adjustment for market size factor, and the value added of the fund positively correlates with age. Secondly, I examine the impacts of fund characteristics on the skills of mutual funds. This part of the research paper allows exploring the nature of mutual fund skills and their dependence on fund-specific characteristics. The findings illustrate the similarity with the outcomes of benchmark papers and indicate the existence of the positive relationship between current compensation and future performance of the fund. Finally, I investigate the relationship between the skills of the mutual fund, its age, and mortality rate. I found that skilled funds tend to have a lower mortality rate. Moreover, the 10-20-years-old funds have the highest mortality rate regardless of the skill levels.