Stock Fund Selection and the Individual Investor

Abstract

This article proposes a scoring model for the selection of actively managed Brazilian stock funds with positive and significant Jensen's alpha. Two performance measures and eight fund characteristics were obtained between 2004 and 2014. The characteristics set is broad and was coded as binary variables. The sample consists of 1,417 funds and minimizes survivorship bias because it includes new and discontinued funds. The scoring was estimated through a binary logistic regression. Less than ten percent of stock funds displayed significant positive alphas. The model denotes past performance as the most important characteristic to select a stock fund with a significant positive alpha. Independent management, investment in other FIA funds and new or younger funds also relate to this selection. Out of sample tests indicate that high scoring stock funds frequently exhibit significant positive and rarely significant negative alphas. High scoring stock funds frequently beat equally weighed portfolios, especially as to risk adjusted returns. There are several indications that professional managers seek to limit volatility, even if it means sacrificing returns. These are important implications for individual investors.

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