Daily Trading Behaviour and the Performance of Investment Managers*

This paper examines the ability of Australian active equity managers to provide superior risk adjusted performance. Utilising daily trade level data, we investigate the role of trade and manager characteristics in trading performance and market impact costs. In terms of trade characteristics, we find evidence of superior trade performance, where such performance is an increasing function of trade size, and a decreasing function of stock size. We also find however, that market impact costs erode a significant portion of the abnormal returns to trade packages, and that such costs are also a function of trade and stock size. These findings are consistent with the theory that managers are able to exploit private information more readily in smaller stocks where the level of monitoring by professional market participants is lower, however in doing so, managers also incur higher market impact costs due to the lower liquidity of smaller stocks. In terms of manager characteristics, we find large managers on average trade less successfully, and incur higher market impact costs than smaller managers. We also find evidence of persistence where managers outperforming over the past year are more likely to continue to trade successfully. JEL classification: G23