Are Mutual Fund Managers Good Gamblers?

58 Pages Posted: 17 Feb 2017 Last revised: 22 Aug 2017

Roberto Stein

University of Nebraska at Lincoln - Department of Finance

Date Written: July 31, 2017


I investigate the skill of mutual fund managers by focusing on their investments in 'Lottery Stocks'. Kumar (2009) characterizes these as stocks with low price, high idiosyncratic risk and high idiosyn- cratic skewness, and shows that these securities underperform other stocks. I find that Lottery Stocks held by mutual fund managers outperform the U.S. equities market, by about 6% per year. On the other hand, Lottery Stocks which fund managers avoid underperform others, by close to 12%. A hedged portfolio which buys Lottery Stocks held by mutual funds, and sells those they ignore, averages an annual return of 22%, with an alpha of similar magnitude. I introduce the 'Lottery Score', the percentage of fund equity assets invested in these stocks. I fi nd that Lottery Funds, those that invest in Lottery Stocks, outperform their Non-Lottery competitors by 1.2% per year. For these funds, the strategy of loading on Lottery Stocks is persistent in time, as is the benefi t derived from it. I show that the Lottery Score is a good predictor of fund performance, even after controlling for a number of other measures of skill. The evidence is consistent with fund managers possessing superior stock-picking skills.

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

JEL Classification: G11, G23

Suggested Citation

Stein, Roberto, Are Mutual Fund Managers Good Gamblers? (July 31, 2017). Available at SSRN: or

Roberto Stein (Contact Author)

University of Nebraska at Lincoln - Department of Finance ( email )

Lincoln, NE 68588-0490
United States

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