Can mutual fund stars still pick stocks?: A replication and extension of Kosowski, Timmermann, Wermers, and White (2006)

  • Timothy Riley and Sam Walton
  • Critical Review of Finance, 2019
  • A version of this paper can be found here
  • Want to read our summaries of academic finance papers? Check out our Academic Research Insight category

What are the Research Questions?

We all intuitively know we are better than average drivers, and if we’re investors, well we know we’re better than average there too. Frankly, we all put ourselves easily in the top 10%, at least. Those that are in the know will quote Buffet’s, “The Superivestors of Graham-and-Doddsville,” but academics will counter with a cite for Kosowski, Timmermann, Wermers, and White (2006). In their original research piece, Kosowski, Timmermann, Wermers, and White find that funds in the top 10% of performance tend to produce alphas in excess of costs that cannot be explained by luck alone. Riley and Walton replicate their work (1975-2002) and extend the out of sample period (2003-2017). This is timely work considering the significant outflows from actively managed funds into passive/index funds.

Specifically, they ask the following research questions:

  1. Do KTWW (2006) results hold in the 2003-2017 out of sample period?
  2. What are the results over the full sample 1975-2017?

What are the Academic Insights?

They find the following:

  1. No, they find no evidence of alphas greater than would be expected based solely on luck.
  2. Doesn’t look good for active stock pickers — the authors find little evidence, to suggest high alphas are not due to luck.

Based on these results, the authors comment:

” Consistent with the actions of investors and research since KTWW’s publication, the “sizable minority of managers [who] pick stocks well enough to more than cover their costs appears to have substantially decreased in size—or perhaps disappeared entirely—during the last 15 years”

Why does it matter?

The authors test out of sample a study that is often cited to justify investing in active mutual funds. KTWW’s finding that a significant number of mutual funds outperformed after costs over the period 1975 to 2002 does not hold over the subsequent 15 years (2003 to 2017) or in the most complete sample available today (1975 to 2017). When citing KTWW, it is important to note both the sensitivity of their results to the time period and that their results are not reflective of the recent history of the mutual fund industry.

One takeaway is that one should avoid stock picking all together. Perhaps this is a reasonable path. However, this research is focused on mutual funds. Maybe stock picking talent has left mutual funds and entered private equity, hedge funds, or other venues where they can maximize the return on their talents.

The Most Important Chart from the Paper

The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index.


Kosowski, Timmermann, Wermers, and White (2006) use a novel bootstrap technique to study the performance of domestic equity mutual funds over the period 1975 to 2002. They find that “a sizable minority of managers pick stocks well enough to more than cover their costs.” When replicating their analysis during their period of study, I find results similar to theirs. However, if I perform an identical analysis over the period 2003 to 2017, I find no evidence of stock selection ability in excess of costs. Furthermore, the combined 1975 to 2017 period indicates that the alphas of the best funds likely occur solely due to luck.

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About the Author: Wesley Gray, PhD

Wesley Gray, PhD
After serving as a Captain in the United States Marine Corps, Dr. Gray earned an MBA and a PhD in finance from the University of Chicago where he studied under Nobel Prize Winner Eugene Fama. Next, Wes took an academic job in his wife’s hometown of Philadelphia and worked as a finance professor at Drexel University. Dr. Gray’s interest in bridging the research gap between academia and industry led him to found Alpha Architect, an asset management firm dedicated to an impact mission of empowering investors through education. He is a contributor to multiple industry publications and regularly speaks to professional investor groups across the country. Wes has published multiple academic papers and four books, including Embedded (Naval Institute Press, 2009), Quantitative Value (Wiley, 2012), DIY Financial Advisor (Wiley, 2015), and Quantitative Momentum (Wiley, 2016). Dr. Gray currently resides in Palmas Del Mar Puerto Rico with his wife and three children. He recently finished the Leadville 100 ultramarathon race and promises to make better life decisions in the future.

Important Disclosures

For informational and educational purposes only and should not be construed as specific investment, accounting, legal, or tax advice. Certain information is deemed to be reliable, but its accuracy and completeness cannot be guaranteed. Third party information may become outdated or otherwise superseded without notice.  Neither the Securities and Exchange Commission (SEC) nor any other federal or state agency has approved, determined the accuracy, or confirmed the adequacy of this article.

The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Alpha Architect, its affiliates or its employees. Our full disclosures are available here. Definitions of common statistics used in our analysis are available here (towards the bottom).

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