Mutual Fund's R^2 as Predictor of Performance

We propose that fund performance can be predicted by its R-super-2, obtained from a regression of its returns on a multifactor benchmark model. Lower R-super-2 indicates greater selectivity, and it significantly predicts better performance. Stock funds sorted into lowest-quintile lagged R-super-2 and highest-quintile lagged alpha produce significant annual alpha of 3.8%. Across funds, R-super-2 is positively associated with fund size and negatively associated with its expenses and manager's tenure. The Author 2013. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oup.com., Oxford University Press.

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