Can Mutual Fund Managers Pick Stocks? Evidence from Their Trades Prior to Earnings Announcements

Recent research finds that the stocks that mutual fund managers buy outperform the stocks that they sell (e g, Chen Jegadeesh and Wermers (2000)) We study the nature of this stock-picking ability We construct measures of trading skill based on how the stocks held and traded by fund managers perform at subsequent corporate earnings announcements This approach increases the power to detect skilled trading and sheds light on its source We find that the average fund s recent buys significantly outperform its recent sells around the next earnings announcement and that this accounts for a disproportionate fraction of the total abnormal returns to fund trades estimated in prior work We find that mutual fund trades also forecast earnings surprises We conclude that mutual fund managers are able to trade profitably in part because they are able to forecast earnings-related fundamentals