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Mutual Fund Screening Versus Weighting [Download]

This paper develops a holdings-based measure of fund performance that distinguishes how fund managers weight stocks in their portfolios and how the managers screen the stocks they choose to hold. I find that screening decisions contribute negatively to the performance of a typical fund whereas portfolio weighting decisions contribute positively. In particular, screening decisions lower fund performance by 0.40% per year before costs whereas weighting decisions increase performance by 0.72% per year for a typical fund during 1980-2016. My results suggest that fund managers could improve their performance by being less active and following their benchmarks closer.