Active Technological Similarity and Mutual Fund Performance

Ping McLemore, Richard Sias, Chi Wan, and H. Zafer Yuksel

We examine whether superior understanding of technological innovation is a source of mutual fund managers’ ability to garner positive abnormal returns. Consistent with our hypothesis, the inter-quintile annual net Carhart alpha spread for mutual funds sorted on changes in the technological similarity of their portfolio holdings is 282 basis points. Moreover, because changes in technological similarity are largely orthogonal to other predictors of mutual fund success (e.g., industry concentration, active share, fund R 2, and lag fund alpha), changes in technological similarity can be combined with other measures to help identify the best performing funds.