Measuring the skill of the fund manager   (PDF)

I introduce a conditional measure of skill, the covariance between fund’s trades and future “news” of the stocks traded. Using this measure, I show that the average fund manager in the cross‐section of U.S. equity mutual funds has stock picking skill. This skill is mainly driven by manager’s ability to predict firm’s cash‐flow news. Importantly, this skill has short term persistence, which is not explained by momentum effect, and is positively related to the traditional measures of performance. Consistent with theory, fund flows are increasing in managerial skill.