Mutual fund managers do have some stock-picking skills according to a recent working paper from the National Bureau of Economic Research.

In the paper, authors Malcolm Baker, Lubomir Litov, Jessica Wachter, and Jeffrey Wurgler measure the stock-picking ability of fund managers based on returns around the time of earnings announcements. “Their basic idea is to determine whether skill is associated with the tendency to hold stocks that are about to enjoy high earnings announcements and likewise to avoid stocks that are about to suffer low earnings announcements,” NBER explains.

The authors say they do indeed find that mutual fund managers show stock-picking skill, “in the sense that the subsequent earnings announcement returns on their weight-increasing stocks are significantly higher than those on their weight-decreasing stocks.” The difference is about 47 basis points over the course of a year. NBER says that this research represents, “unusually clean evidence of trading skill”.

The authors also find that growth funds are more likely than income funds to reveal stock-picking skill. They also, “find that larger funds, higher turnover funds, and those that use incentive fees show better performance.”

However, NBER also cautions that the authors’ method, “may not be suited to measuring the total returns earned by fund managers. They also do not address whether active mutual fund managers earn abnormal returns that are large enough to exceed the fees they charge.”