Mutual Fund Strategy: Swing for the Fences or Bat for Average

Abstract

We document two distinct mutual fund strategies: "Swing for the Fences" and "Bat for Average." Swinging for the fences means holding home runs and strikeouts defined as holdings with extreme style-adjusted returns on either tail of the return distribution. In contrast, funds that bat for average do not hold stocks with extreme returns. These strategies are persistent for more than 12 quarters. Swing for the Fences funds attract more fund flow, charge higher management fees, and hold riskier portfolios; yet, they fail to deliver higher risk-adjusted returns. In falsification tests, these strategies do not appear in a sample of passive funds.

Keywords: Mutual Fund Performance, Performance Persistence, Mutual Fund Holdings, Investment Skill, Stock Picking Ability

JEL Classification: G38, G34