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Fund manager conviction and investment performance

Jin, Liang, Taffler, Richard, Eshraghi, Arman and Tosun, Onur 2020. Fund manager conviction and investment performance. International Review of Financial Analysis 71 , 101550. 10.1016/j.irfa.2020.101550
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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.

Item Type: Article
Date Type: Publication
Status: Published
Schools: Business (Including Economics)
Publisher: Elsevier
ISSN: 1057-5219
Date of First Compliant Deposit: 2 October 2020
Date of Acceptance: 19 June 2020
Last Modified: 25 Mar 2021 19:00

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