Trading Skills of Mutual Fund Managers : Evidence from Daily Transactions

This paper evaluates fund managers’ trading skills using a novel dataset of daily mutual fund transactions. We document strong evidence of short term trading performance for both buys and sells lasting up to one month. By establishing a link between a fund’s trades, holdings, and reported net returns, we demonstrate that trading performance translates almost one to one into fund performance and show that a significant proportion of the reported net returns are generated through trading. Furthermore, we find that trading performance differs significantly across funds and is highly persistent in the short term. We argue that trading skill is a manager attribute that is also related to fund size and expense and that liquidity provision is a major driver of documented short term performance. These results thus constitute new evidence that managers provide value to their clients through above-par investment skills