Are Mutual Fund Managers Good Gamblers?

Abstract

I investigate whether mutual fund manager possess superior stock picking skills, by comparing the performance of stocks they hold in their portfolios versus that of stocks which they do not hold. In particular, I focus on a class of assets identified as "Lottery Stocks". These are stocks with below median price, and above median idiosyncratic volatility and idiosyncratic skewness. Lottery Stocks have been shown in the past to strongly underperform the average stock in the market. I find that, on average, stocks held by mutual fund managers outperform those they do not by 3.8% per year. However, Lottery Stocks held by the funds outperform Lottery Stocks they avoid by more than 24% per year. While this impressive evidence of stock picking skill does not seem to translate into outperformance of the funds themselves, a fund's loading on Lottery Stocks is shown to be a robust predictor of future performance, and could potentially be used by investors to identify skillful managers.

Keywords: Mutual funds, portfolio holdings, fund performance, fund manager skill

JEL Classification: G11, G23