Fund manager conviction and investment performance

This paper examines the role conviction plays in asset management and its relationship with investment returns. We measure the strength of fund manager conviction through a fund's Active Share, i.e., the extent to which an investment portfolio differs from its benchmark index. First, we show fund manager conviction increases following both superior and, surprisingly, inferior past performance, and more so among solo-managed than team-managed funds. Second, and more importantly, we find an inverse-U relationship between conviction and subsequent performance. High levels of conviction proxied by high Active Share are associated with lower future returns and greater fund risk. Our study also illustrates an asymmetric investor reaction to fund manager conviction in the form of higher (lower) fund inflows rewarding good performance by high (low) conviction managers, but no pronounced penalties for poor performance, ceteris paribus. •Conviction is the means by which fund managers are able to overcome the uncertainty of investment outcomes.•Fund manager conviction level can be proxied by Active Share•Fund manager conviction increases following good performance•Solo-managed funds are more prone to excessive conviction than team-managed funds•Conviction has a clear inverted-U performance with future fund performance – there is an optimal range•Fund investors chase high conviction fund managers