Origins of Mutual Fund Skill: Market versus Accounting Based Asset Pricing Anomalies

Abstract

This paper investigates the source of active U.S. equity mutual funds’ value added using 234 public asset pricing anomalies. We find that mutual funds on average lose substantial value through their high exposure to the short legs of accounting anomalies (e.g. investment, profitability, accrual). This high exposure is largely because of the high correlation between the short legs of accounting anomalies and the long legs of anomalies based on market information (e.g. momentum, liquidity risk, seasonality). Funds do not manage to keep a low exposure to the former while profiting from a high exposure to the latter. Further evidence suggests that the negative exposure to accounting anomalies is not due to fund flows or the career concerns of fund managers.

Keywords: Mutual funds; Anomalies; Value added; Public information; Investment decisions

JEL Classification: G11; G14; G23