We use a new database to perform a comprehensive analysis of the mutual fund industry. We find that funds hold stocks that outperform the market by 1.3 percent per year, but their net returns underperform by one percent. Of the 2.3 percent difference between these results, 0.7 percent is due to the underperformance of nonstock holdings, whereas 1.6 percent is due to expenses and transactions costs. Thus, funds pick stocks well enough to cover their costs. Also, high-turnover funds beat the Vanguard Index 500 fund on a net return basis. Our evidence supports the value of active mutual fund management. DO MUTUAL FUND MANAGERS WHO actively trade stocks add value? Academics have debated this issue since the seminal paper of Jensen ~1968!. Although some controversy still exists, the majority of studies now conclude that actively managed funds ~e.g., the Fidelity Magellan fund!, on average, underperform their passively managed counterparts ~e.g., the Vanguard Index 500 fund!. 1 For example, Gruber ~1996! finds that the average mutual fund underperforms

We analyze the trading activity of the mutual fund industry from 1975 through 1994 to determine whether funds “herd ” when they trade stocks and to investigate the impact of herding on stock prices. Although we find little herding by mutual funds in the average stock, we find much higher levels in trades of small stocks and in trading by growth-oriented funds. Stocks that herds buy outperform stocks that they sell by 4 percent during the following six months; this return difference is much more pronounced among small stocks. Our results are consistent with mutual fund herding speeding the price-adjustment process. DO INSTITUTIONAL INVESTORS “F LOCK TOGETHER ” ~or “herd, ” as it is often called! when they trade securities? Do some investors follow the lead of others when they trade? Such questions have interested researchers for some time, and are central to understanding the impact of institutional trading on securities markets and to understanding the way in which information becomes incorporated into market prices. 1

We investigate the value of active mutual fund management by examining the stockholdings and trades of mutual funds. We find that stocks widely held by funds do not outperform other stocks. However, stocks purchased by funds have significantly higher returns than stocks that are sold—this is true for large stocks as well as small stocks, and for value stocks as well as growth stocks. Moreover, growth-oriented funds exhibit better stockselection skills than income-oriented funds, especially in picking large growth stocks. Finally, funds trading more frequently have, at best, marginally better stock-selection skills than funds that trade less often. The Value of Active Mutual Fund Management: An Examination of the Stockholdings and Trades of Fund Managers I.

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his support with the CDA/Spectrum database. We especially thank Russ Wermers for providing us with the characteristic-adjusted stock returns reported in DGTW (1997). We acknowledge the financial support from Mitsui Life Center in acquiring the CDA/Spectrum data. All errors are our own responsibility. On the Industry Concentration of Actively Managed Equity Mutual Funds The value of active fund management recently has become a central debate among researchers and practitioners. Mutual fund managers can deviate from the passive market portfolio by concentrating their holdings in specific industries. We investigate whether mutual fund managers are motivated to hold concentrated portfolios because they have investment skills that are linked to specific industries or whether they are motivated by agency problems that induce them to hold poorly diversified portfolios. Using U.S. mutual fund data from 1984-1999, we study the relationship between the industry concentration of mutual funds and their performance. Our analysis indicates that mutual funds differ substantially in their industry concentration, and that concentrated funds tend to follow distinct investment styles. Managers of more concentrated funds

Research in Finance. We also express appreciation to Bill Crawford and Lisa Simms at Micropal

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We investigate the value of active mutual fund management by examining the stockholdings and trades of mutual funds. We find that stocks widely held by funds do not outperform other stocks. However, stocks purchased by funds have significantly higher returns than stocks they sell—this is true for large stocks as well as small stocks, and for value stocks as well as growth stocks. We find that growth-oriented funds exhibit better stock-selection skills than income-oriented funds. Finally, we find only weak evidence that funds with the best past performance have better stock-picking skills than funds with the worst past performance. The Value of Active Mutual Fund Management: An Examination of the Stockholdings and Trades of Fund Managers I.

It is a widespread practice among mutual fund managers to voluntarily waive fees that they have a contractual right to claim. This fact is puzzling and changes how contractual fees should be interpreted by investors, regulators, and academic researchers. Notably, the effective fee charged may be substantially less than indicated in expense ratios and may vary over the year despite a constant contractual fee. This study argues that fund managers use fee waivers instead of a at contracted fee because waivers provide flexibility. Flexible fees are desirable since managers can strategically adjust net advisory fees to current realization in performance as a means of attracting investors. However, it is costly for managers to attain full flexibility in fees. Estimation results suggest that the amount of the fee waiver is set as a competitive pricing mechanism to attract investors for both money market and equity funds.

This paper focuses on the aspect of performance that is due to commonality in the managers' techniques. In this paper, a fund manager's ability to select outperforming stocks is judged by the extent to which his investment decisions resemble those of other successful managers. One way to assess the similarity of the managers' investment decisions is to compare the compositions of their portfolios. For example, consider two managers with equally impressive past returns, where one manager currently keeps a big chunk of his portfolio in the stock of Intel, while the other manager holds mostly Microsoft. Suppose also that Intel is currently held especially by managers with good past performance, whereas Microsoft is held mostly by managers with undistinguished records. It seems reasonable to rule that the first manager, whose decision to hold Intel is shared by a higher-caliber set of managers, has superior ability to select stocks, while the second manager, whose techniques coincide with those of subpar managers, has been merely fortunate