Abstract
Other holdings (OH), including cash, are commonly held in nearly all U.S. equity mutual fund portfolios. This paper investigates the portfolio effects of OH beyond their broad liquidity purposes. I document OH positions in mutual fund portfolios, discovering a surprising correlation between OH percentage allocations and measures of active manager skill. Although cash and bond holdings represent a substantial fraction of all OH investments, I find that as a fund's allocation to OH increases, a steadily increasing proportion of OH is invested in equity investments not included in the CRSP equity database. Although OH assets are not a significant source of abnormal returns in the average mutual fund, they are a source of abnormal return in some of the most skilled mutual funds. In addition, empirical tests suggest that the unobserved trading actions of fund managers reduce both the return gap and abnormal returns of U.S. equity mutual funds, consistent with the return effects of costly mutual fund trades. Persistent, abnormal return predictability appears only among the most skilled funds that invest significantly in OH assets.
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