DP10261 Do Funds Make More When They Trade More?
|Author(s):||Lubo? Pástor, Robert F. Stambaugh, Lucian Taylor|
|Publication Date:||November 2014|
|Keyword(s):||active management, mutual funds, performance, skill, turnover|
|Programme Areas:||Financial Economics|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=10261|
We find that active mutual funds perform better after trading more. This time-series relation between a fund?s turnover and its subsequent benchmarkadjusted return is especially strong for small, high-fee funds. These results are consistent with high-fee funds having greater skill to identify time-varying profit opportunities and with small funds being more able to exploit those opportunities. In addition to this novel evidence of managerial skill and fund-level decreasing returns to scale, we find evidence of industry-level decreasing returns: The positive turnover-performance relation weakens when funds act more in concert. We also identify a common component of fund trading that is correlated with mispricing proxies and helps predict fund returns.