Mutual Fund Screening versus Weighting

This paper develops a holdings-based measure of fund performance that distinguishes how fund managers weight stocks in their portfolios from how they screen the stocks they choose to hold. I find that screening decisions contribute negatively to the performance of a typical fund whereas portfolio weighting decisions contribute positively. In particular, screening decisions lower fund performance by 0.40% per year before costs. Weighting decisions contribute 0.72% in performance per year for a typical fund during 1980-2016. Even though the managers possess weighting ability, which in isolation suggests skill, when I also consider the ability to pick which stocks to hold, skill is no longer present. My results also suggest that fund managers could improve their performance by following a benchmark closer in terms of holdings but not in terms of weights.