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Analyzing the nature of fund selection measures: Stock picking or trading skill?

Author

Listed:
  • Sun, Ping-Wen
  • Liao, Wen-Ju
  • Lin, Wanling

Abstract

We analyze why fund selection measures, including daily six factor alpha, daily return volatility, and minimum churn rate of a fund within a quarter, predict fund performance. Among these three fund selection measures, we demonstrate that funds with lower return volatility generate better fund performance, portfolio holdings performance, and trading portfolio performance. This result suggests that funds with lower return volatility possess better both stock picking and trading skill. In addition, funds with higher alpha or higher minimum churn rate have better fund performance and better portfolio holdings performance, but worse trading portfolio performance. As we demonstrate that portfolio holdings performance rather than trading portfolio performance mainly contributes to fund performance, our findings suggest that fund investors should pay attention to funds’ stock picking skill more than their trading skill. Moreover, funds’ lack of trading skill helps explain why original funds may underperform copycat funds.

Suggested Citation

  • Sun, Ping-Wen & Liao, Wen-Ju & Lin, Wanling, 2024. "Analyzing the nature of fund selection measures: Stock picking or trading skill?," The Quarterly Review of Economics and Finance, Elsevier, vol. 97(C).
  • Handle: RePEc:eee:quaeco:v:97:y:2024:i:c:s1062976924000899
    DOI: 10.1016/j.qref.2024.101883
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    More about this item

    Keywords

    Fund performance; Portfolio disclosure; Stock picking; Trading skill; Fund selection;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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