Deriving managerial skills by dissecting holding changes of mutual funds: Evidence from China

Abstract

How to select a skilled fund is important for mutual fund investors. We hypothesize that the changes of a fund's holding reflect the fund's investment skills irrespective of the nature of the fund's skills. Accordingly, we propose three skill measures of a fund by comparing the performance of a fund's latest stock holdings with the performance of its previous stock holdings in the China's A-shares market over a six-month period. The three skill measures include the difference in performance during the whole period, around the earnings announcement period, and during the period that excludes the earnings announcement period. Consistent with our hypothesis, these measures successfully identify the funds that perform better in the following six months. Comparing these measures with the return gap proposed by Kacperczyk et al. (2008), we find that our measures emphasize the medium-term trading skills while the return gap focuses on the short-term trading skills. Furthermore, our results suggest that fund investors can improve their performance by utilizing funds' short-term and medium-term trading skills. However, since the better performance of a fund as identified by our skill measures disappears after six months, fund investors who apply our skill measures must evaluate funds every six months to achieve better performance.