On Luck versus Skill in Fund Performance: Does Style Matter?

We use a range of performance measures and a style-based approach to examine whether the degree of luck and skill in fund performance varies across investment styles. Using a sample of U.S. equity funds, for the period 1990-2011, we find that different segments of the market, ranging from large-cap growth to small-cap value, exhibit different levels of skill and luck when measured against different benchmarks. Our results also show that the use of standard multi-factor models underestimates managerial ability and overstates the proportion of funds whose abnormal performance can be attributed to chance rather than to skill, when compared against the use of style-consistent practitioner benchmarks. We also find that a single factor model that uses Russell Benchmark indices consistent with the style orientation of funds and market practice provides a parsimonious way of accounting for the risks in style and size tilts