Do Funds Make More When They Trade More?
48 Pages Posted: 24 Nov 2014
Date Written: November 2014
We find that active mutual funds perform better after trading more. This time-series relation between a fund's turnover and its subsequent benchmark adjusted 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.
Keywords: active management, mutual funds, performance, skill, turnover
JEL Classification: G10, G20
Suggested Citation: Suggested Citation