Abstract
AbstractWe investigate the value added by active mutual fund management by examining a comprehensive database of monthly trades of equity mutual funds because understanding how managers add value for their clients is important in the current context of a growing fraction of individual investors delegating their portfolio management to professional managers. We find that the value added by trading based on valuation criteria outperform trading decisions motivated by other reasons such as liquidity and taxes. This finding is obtained using both the measures previously proposed by financial literature as well as some refinements proposed here to evaluate the role of mutual funds' cash level as well as the interdependence between buying and selling decisions. In addition, mutual funds that trade based on valuation criteria more frequently outperform funds that follow this type of trading occasionally. The results are consistent with the notion that active mutual funds on average fail to outperform passive benchmarks and only a subset of funds have skilled managers.
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