Mutual Fund Industry Selection and Persistence

We analyze mutual fund industry selectivity—the performance of a fund’s industry allocation relative to the market. We find that industry selection accounts for a full third of fund performance based on two-digit standard industrial classification (SIC) codes, with the remaining attributable to the performance of individual stocks relative to their own industries. More importantly, we find that industry-selection skill drives persistence in relative performance. Unlike stock-selection ability, industry selectivity is not eroded by increasing fund assets. Our results suggest that accounting for a manager’s ability to pick outperforming industries provides information beyond standard performance measures that can enhance a fund investor’s future performance.