Trading Cost Management of Mutual Funds

This paper documents the trading behaviour of actively managed equity mutual funds from the perspective of their trading cost management. Consistent with the predictions in the literature of portfolio choice with trading costs, I present three main findings. Firstly, mutual funds trade more liquid stocks than illiquid stocks when there are large fund flows. Secondly, these mutual funds spread their trades over stocks, especially for outflow-driven sales. Finally, they also spread their flow-driven trades over time and use cash buffers. Spreading trades over stocks and time is consistent with a trading cost increasing and convex in trading amount, which is also consistent with the key assumption in Berk and Green (2004) that costs are increasing and convex in fund size.