Academic Knowledge Dissemination in the Mutual Fund Industry: Can Mutual Funds Successfully Adopt Factor Investing Strategies?

Abstract

In this study, we investigate if investors that have adopted investment strategies based on asset pricing anomalies documented in the academic literature (i.e., the low-beta, small cap, value, momentum, short-term reversal, and long-term reversal factors) consistently earn positive abnormal returns. For this purpose we evaluate the performance of a large sample of U.S. equity mutual funds over the period 1990 to 2010. We find evidence supporting the value added of investors adopting factor investing strategies: low-beta, small cap, and value funds earn significant excess returns. We also find that these excess returns are sustainable and have not disappeared after the public dissemination of the anomalies when more asset managers have started to adopt factor investing strategies. We propose some criteria that might be helpful to determine the successful application of academic insights in the context of investment strategies. Our findings have significant implications for the role of academic research and knowledge management in the investment management industry.

Keywords: intellectual capital, mutual fund performance, asset pricing anomalies, out-of-sample testing, factor investing, low-risk, small cap, value, momentum, short-term reversal, long-term reversal

JEL Classification: G11, G14, G19