Investing in mutual funds when returns are predictable

Doron Avramov and Russell Wermers ()

No 05-13, CFR Working Papers from University of Cologne, Centre for Financial Research (CFR)

Abstract: This paper analyzes the performance of portfolio strategies that invest in noload, open-end U.S. domestic equity mutual funds, incorporating predictability in (i) manager skills, (ii) fund risk-loadings, and (iii) benchmark returns. Predictability in manager skills is found to be the dominant source of investment profitability - long-only strategies that incorporate such predictability considerably outperform prior-documented hot-hands and smart-money strategies, and generate positive and significant performance with respect to the Fama-French and momentum benchmarks. Specifically, these strategies outperform their benchmarks by 2-4% per year through their ability to time industries over the business cycle. Moreover, they choose individual funds that outperform their industry benchmarks to achieve an additional 3-6% per year. Overall, our findings indicate that industries are important in locating outperforming mutual funds, and that active management adds much more value than documented by prior studies.

Date: 2005
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Journal Article: Investing in mutual funds when returns are predictable (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:cfrwps:0513

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