The payback of mutual fund selectivity in European markets

Abstract

Is European fund management selectivity skill (1 − R2) profitable (alpha)? To examine this question, we use a sample of 2,947 actively managed domestic equity mutual funds from 11 European countries. We find that high fund selectivity generates significant investor gains. The results are robust to investor sentiment and stock-market dispersion conditions. Moreover, we investigate the moderating effect of country characteristics on the profitability of fund selectivity and find that managers' selectivity ability is more valuable in countries with high economic development, strong legal system, small but highly liquid equity markets, and young mutual fund industries.