Do active Mutual Fund Managers Deserve their Fees? A Return-Based Style Analysis on their Performance

9 Introduction In the present thesis we discuss one of the most famous topics in the literature on mutual funds performances: do fund managers really deserve their fees? Our focus is exclusively on the top performing funds which invested in S&P 500 stocks in the period from March 31 st 1999 to December 31 st 2019. Our goal is to determine if at least the most successful managers, belonging to the 1% highest percentile of the distribution of 5001 different funds, have measurable skills that can benefit the investors after adjusting the performance for the risk and the operational expenses. In order to perform our analysis, we employed a technique called Return-Based Style Analysis that helped us in the determination of the portfolio style of each manager. Afterwards, we reported the Alpha returns that they achieve, calculated as the difference between their performance and the reference benchmark and representative of the manager’s contribution to the results. In conclusion, we estimate if the Alphas, also known as active returns, are driven by the exposure to factors or should be reconducted to the skills of the managers. Our study is part of the line of research that follows the findings of Fama and French (2010), who show that the largest majority of mutual fund managers have a negative or statistically not significant impact on returns. Only a small subgroup of managers, belonging to the high tail of the distribution of returns, is deemed able to achieve positive extra returns over the benchmark and to transfer them to the investors. The originality of our approach is to focus only on the top 1% of the universe of managers, discarding all the other managers who didn’t perform as well as them. We use traditional tools, like factor investing and RBSA, blending them together to determine whether, at least the top 1% of the managers show actual skills. This small subset has not been deeply analyzed yet by other researchers, who instead focused on larger groups of managers without a-priori selection: conclusions have never been directly drawn to the top 1%, but only the majority of the managers. We estimate this extra return at an average of 3.98% among the subset of skilled managers and our analysis aims at drawing a clearer and more detailed picture on this talented subgroup. The results of our research confirms that there is only a fraction among the high-performing managers with significant skills that should be compensated with appropriate fees. In our sample of 30 funds meeting all the selection constraints that we have imposed, the fraction of skilled managers is 60%, meaning that our estimation is that only 0.60% of the universe managers is able to generate significant extra returns. The remaining managers, instead, didn’t achieve Alphas which were significantly different from zero,