The components of tracking error, interim trading and mutual fund performance

Juan Carlos Matallín-Sáez and Diego Víctor de Mingo-López

International Review of Economics & Finance, 2025, vol. 98, issue C

Abstract: This study examines active management due to interim trading in mutual funds. We propose a novel and standardized measure to estimate active management within a quarter. This measure is based on the fund tracking error in relation to the behaviour of a synthetic portfolio emulating its initial weight structure. In implementing a factor pricing model, this measure is decomposed into two components related to fund intra-quarterly changes in systematic and idiosyncratic risks. Results show that funds experience low levels of active management within a quarter, mainly arising from the differences in fund and synthetic portfolio residuals. In addition, interim trading erodes fund performance in the short term. Nonetheless, a positive effect on traditional alphas arises in the mid-term, linked to strategic asset allocation decisions. The suggested measure and the reported evidence are of interest to help stakeholders to understand and evaluate the impact of unobservable managerial decisions.

Keywords: Mutual fund; Performance; Idiosyncratic risk; Active management; Tracking error (search for similar items in EconPapers)
JEL-codes: G11 G23 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:98:y:2025:i:c:s1059056025000371

DOI: 10.1016/j.iref.2025.103874

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