Mutual fund managers may decide to deviate from a well-diversified portfolio and concentrate their holdings in industries where they have informational advantages. In this paper, we study the relation between the industry concentration and the performance of actively managed U.S. mutual funds from 1984 to 1999. Our results indicate that, on average, more concentrated funds perform better after controlling for risk and style differences using various performance measures. This finding suggests that investment ability is more evident among managers who hold portfolios concentrated in a few industries.

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A previous study finds evidence to support selection ability among active fund investors for equity funds listed in 1982. Using a large sample of equity funds, I find evidence that funds that receive more money subsequently perform significantly better than those that lose money. This effect is short-lived and is largely but not completely explained by a strategy of betting on winners. In the aggregate, there is no significant evidence that funds that receive more money subsequently beat the market. However, it is possible to earn positive abnormal returns by using the cash f low information for small funds.HAVING EXPERIENCED DRAMATIC GROWTH in the past two decades, the mutual fund industry plays an important role in the U.S. economy. As a major investment vehicle, open-end mutual funds at the end of the first quarter of 1998 managed about $3.3 trillion in assets, a sum that exceeds all bank savings deposits. Due to the great number of funds in existence, evaluating managers' performance and selecting funds with relatively high riskadjusted returns can be an especially difficult and challenging task. The growth of data companies such as Lipper, Morningstar, and Micropal and the explosion in the publication of books and articles on mutual funds both ref lect investors' tremendous demand for detailed mutual fund information and investment advice. This huge demand suggests that many investors are making mutual fund investment decisions themselves and many of them study current and historical information about funds carefully during the decision-making process. With all the effort spent in selecting and evaluat-

Despite extensive disclosure requirements, mutual fund investors do not observe all actions of fund managers. We estimate the impact of unobserved actions on fund returns using the return gap-the difference between the reported fund return and the return on a portfolio that invests in the previously disclosed fund holdings. We document that unobserved actions of some funds persistently create value, while such actions of other funds destroy value. Our main result shows that the return gap predicts fund performance. (JEL G11, G23) Despite extensive disclosure requirements, mutual fund investors do not observe all actions of fund managers. For example, fund investors do not observe the exact timing of trades and the corresponding transaction costs. On the one hand, fund investors may benefit from unobserved interim trades by skilled fund managers who use their informational advantage to time the purchases and the sales of individual stocks optimally. On the other hand, they may bear hidden costs, such as trading costs, agency costs, and negative investor externalities. In this paper, we analyze the impact of unobserved actions on mutual fund performance.

Mutual fund managers may decide to deviate from a well-diversified portfolio and concentrate their holdings in industries where they have informational advantages. In this paper, we study the relation between the industry concentration and the performance of actively managed U.S. mutual funds from 1984 to 1999. Our results indicate that, on average, more concentrated funds perform better after controlling for risk and style differences using various performance measures. This finding suggests that investment ability is more evident among managers who hold portfolios concentrated in a few industries. Copyright 2005 by The American Finance Association.

Research summary:Previous studies have mixed findings on the relation between corporate socially responsible policies and firm performance. This paper focuses on a specific type of corporate social responsibility-corporate sexual equality, measuring how a firm treats its lesbian, gay, bisexual, and transgender (LGBT) employees, consumers, and investors-and examines whether and how it relates to firm performance. Using a longitudinal dataset of public firms in the U.S. during the period of 2002-2006, we demonstrate that firms with a higher degree of corporate sexual equality have higher stock returns and higher market valuation. We also identify one of the mediating channels, the labor market channel, that brings higher productivity to firms that embrace sexual equality. Managerial summary: Corporate sexual equality measures how a company treats its lesbian, gay, bisexual, and transgender (LGBT) employees, consumers, and investors. It is an important dimension of corporate social responsibility policies and diversity management. Using a longitudinal dataset of public firms in the U.S. during the period of 2002-2006, we demonstrate that firms with a higher degree of corporate sexual equality have higher stock returns, higher market valuation, and higher labor productivity. Our findings suggest that discriminatory hiring behaviors based on sexual orientation hurt employers and shareholders financially and that implementing corporate sexual equality policies can enhance firms' financial performance, generating competitive advantages in labor markets and mutual benefits between employers and employees.

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In this paper, we investigate the dynamics of the relationship between aggregate institutional trading and stock returns. We show that returns Granger-cause institutional trading, especially purchases, rather than vice versa. This robust and significant causality can be largely explained by the time-series variation of market returns, that is, institutions buy more popular stocks after market rises. A careful analysis of the behavior of trading and the returns of the traded stocks reveals strong evidence that stocks with heavy institutional buying (selling) experience positive (negative) momentum over the previous 12 months. The pattern in returns and excess returns is mimicked almost perfectly by the trading behavior of institutions. The most intriguing finding however is that excess returns disappear immediately as the intense trading (buying/selling) activity by institutions drops sharply. By examining five subgroups of institutional investors, we find that mutual funds and investment advisors mainly drive the aggregate return and trading patterns. Our study provides a comprehensive analysis of the behavior of all types of institutions and uncovers some distinct patterns in the trading activities of institutions and the returns of stocks they buy/sell. 1