Are Mutual Fund Managers Good Gamblers?
60 Pages Posted: 17 Feb 2017 Last revised: 21 Dec 2018
Date Written: April 18, 2018
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. In fact, a mimicking portfolio that uses this information is shown to potentially generate high returns and be nearly riskless, so that its annual alpha is over 25%. While this impressive evidence of stock picking skill does not seem to translate into improved risk-adjusted returns for the funds themselves, a fund's loading on Lottery stocks is shown to be a strong 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
Suggested Citation: Suggested Citation