Portfolio Overlap and Mutual Fund Performance

This paper investigates the cross-sectional distribution of performance among actively managed equity mutual funds and highlights a novel investment characteristic of successful funds based on the degree to which their holdings do not overlap with those of other funds. We find that our measure of portfolio overlap strongly predicts funds' future extra performance across various time horizons and is related to managers' skills to i) buy(sell) undervalued(overvalued) stocks, ii) select securities that outperform characteristic-based benchmark portfolios, and iii) time different investment styles effectively. Our findings indicate that fund management structure, such as turnover and team size, strongly impacts portfolio decisions.