This paper examines whether mutual fund managers can outperform after accounting for portfolio risk, introducing the measure now known as Jensen’s alpha. Across 115 funds, the findings suggest limited forecasting skill, with average performance falling short even before management expenses were deducted.
The Performance of Mutual Funds in the Period 1945-1964
Michael Jensen
Research
37 Pages
Key Takeaways
Returns Fell Short: After expenses, funds earned an average of 1.1% annually below the returns implied by their portfolio risk.
Costs Explain Part: Adding back management expenses reduced average annual underperformance to 0.4%, with brokerage commissions still included.
Luck Complicates Skill: Only 3 funds showed statistically significant outperformance at the 5% level, fewer than the 5 or 6 expected by chance.
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