We analyze gains from intercorporate sales of mutual fund subsidiaries, using mandated SEC disclosures to assess the performance of mutual funds transferred by these transactions. Sellers are financial conglomerates (banks) using equity-based deals to transfer poorly performing funds to highly focused asset management companies. The transferred funds experience significant improvements in risk-adjusted returns, efficiency, and asset growth. These improvements are closely correlated with the gains in wealth to buyers and sellers at deal announcements, indicating the market efficiently capitalizes expected performance improvements. Our results provide evidence that these transactions transfer assets to acquirers better able to manage them, generating gains for fund holders and buyer and seller shareholders.

One caveat of current literature on the value of active management is the lack of treatment for the performance measures that can be gamed. We propose to use the performance measure that can’t be manipulated with respect to the underlying distribution, time variation, nor estimation error, (the manipulation-proof performance measure (MPPM, Goetzmann et al. (2007)), to rank all active U.S. domestic equity mutual funds from 1980 to 2013 on a quarterly basis to analyze managerial skills. We find fund managers in the higher ranked persistently outperform lower ranked managers by posting higher gross and net fund returns, higher holding-based returns, and generating positive return gap. Analyzing the holdings of the portfolios indicates higher ranked managers hold stocks with higher information asymmetry, especially the growth companies that are younger, smaller, and with lower liquidity. Our results show that the spread on gross and net fund returns between highest ranked and the lowest ranked fund managers is between 49 and 52 basis points per month. The holding returns are statistically significant for up to six months indicating the stock picking skills exist for those higher ranked managers. Even though MPPM identifies managerial skills, the positive alphas may not be warranted due to their operating expenses.