Discussion paper

DP10261 Do Funds Make More When They Trade More?

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.


Stambaugh, R, L Pástor and L Taylor (2014), ‘DP10261 Do Funds Make More When They Trade More?‘, CEPR Discussion Paper No. 10261. CEPR Press, Paris & London. https://cepr.org/publications/dp10261