Information Content When Mutual Funds Deviate from Benchmarks

Hao Jiang (), Marno Verbeek and Yu Wang ()
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Hao Jiang: Rotterdam School of Management, Erasmus University, 3062 PA Rotterdam, The Netherlands; and Department of Finance, McCombs School of Business, University of Texas at Austin, Austin, Texas 78712
Yu Wang: IMC Asset Management, 1077 XX Amsterdam, The Netherlands

Management Science, 2014, vol. 60, issue 8, 2038-2053

Abstract: The consensus wisdom of active mutual fund managers, as reflected in their average over- and underweighting decisions, contains valuable information about future stock returns. Analyzing a comprehensive sample of active U.S. equity funds from 1984 to 2008, we find that stocks heavily overweighted by active funds outperform their underweighted counterparts by more than 7% per year, after adjustments for their loadings on the market, size, value, and momentum factors. This large premium dissipates quickly as the consensus view becomes publicly available. These results are consistent with the notion that informed investing by active mutual funds enhances the informativeness of stock prices. In addition, active mutual funds invest only a small portion of fund assets in high alpha stocks, in accordance with the consensus view that active mutual funds on average fail to outperform passive benchmarks.Data, as supplemental material, are available at http://dx.doi.org/10.1287/mnsc.2013.1847 . This paper was accepted by Brad Barber, finance.

Keywords: mutual funds; benchmarks; private information; market efficiency; fund performance (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (19)

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