The Telling Trades of Mutual Funds

Abstract

Under the assumption that mutual funds trade at quarter commencement, some funds exhibit and exploit persistent stock selection talent; i.e., the stocks purchased consistently outperform the stocks sold, and the higher turnover of these funds indicates that managers are capitalizing on their forecasting abilities. However, any evidence of sustained stock selection skill disappears when alternate trade-timing assumptions are considered, suggesting that some skilled managers are electing to trade earlier than previously assumed. Overall, my results question the appropriateness of the quarter end trading assumption and the validity of existing studies which employ it.