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Information Content When Mutual Funds Deviate from Benchmarks

33 Pages Posted: 12 Mar 2011 Last revised: 16 Sep 2013

Hao Jiang

Michigan State University

Marno Verbeek

Erasmus University - Rotterdam School of Management; Erasmus Research Institute of Management (ERIM); Netspar

Yu Wang

IMC Financial Markets & Asset Management; Erasmus University - Rotterdam School of Management

Date Written: August 2013

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 1984-2008, 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.

Keywords: Mutual Funds, Benchmarks, Private Information, Fund Performance

JEL Classification: G10, G11, G14, G23

Suggested Citation

Jiang, Hao and Verbeek, Marno and Wang, Yu, Information Content When Mutual Funds Deviate from Benchmarks (August 2013). AFA 2012 Chicago Meetings Paper . Available at SSRN: https://ssrn.com/abstract=1782692 or http://dx.doi.org/10.2139/ssrn.1782692

Hao Jiang (Contact Author)

Michigan State University ( email )

315 Eppley Center
Department of Finance
East Lansing, MI 48824
United States

HOME PAGE: http://sites.google.com/site/haojiangfinance/

Marno Verbeek

Erasmus University - Rotterdam School of Management ( email )

P.O. Box 1738
Room T09-53
3000 DR Rotterdam
Netherlands
+31 10 408 2790 (Phone)

HOME PAGE: http://www.rsm.nl/mverbeek

Erasmus Research Institute of Management (ERIM)

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Netspar

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Yu Wang

IMC Financial Markets & Asset Management ( email )

Strawinskylaan 377, WTC D-tower
Amsterdam, 1077 XX
Netherlands

Erasmus University - Rotterdam School of Management ( email )

P.O. Box 1738
Room T08-35
3000 DR Rotterdam
Netherlands

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