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Do Funds Make More When They Trade More?

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  • Stambaugh, Robert F.
  • Pástor, LuboÅ¡
  • Taylor, Lucian

Abstract

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.

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  • Stambaugh, Robert F. & Pástor, LuboÅ¡ & Taylor, Lucian, 2014. "Do Funds Make More When They Trade More?," CEPR Discussion Papers 10261, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:10261
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    More about this item

    Keywords

    Turnover; Skill; Performance; Active management; Mutual funds;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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