Fund trading divergence and performance contribution

Considering that the most distinct trading decisions are crucial to evaluate the ability of fund managers to add value, this paper aims to examine the trading divergence level among mutual funds and to capture its determinants and its performance consequences. We propose a measure that is more informative than the traditional overlap metrics, providing evidence of a positive and significant trend of fund trading divergence over time, especially after the Global Financial Crisis (GFC) of 2008. Our results also show a negative influence of market stress on the trading divergence level. Interestingly, we find greater contribution to subsequent fund performance in the divergent portions of trading decisions. •Fund managers trade more divergently over time.•The level of trading divergence is lower with high market stress.•Funds with high portfolio overlap subsequently show less trading divergence.•The trading divergence level is higher within the same fund family.•The divergent trading decisions are able to add value to the portfolio.