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Information Content When Mutual Funds Deviate from Benchmarks

Author

Listed:
  • Hao Jiang

    (Rotterdam School of Management, Erasmus University, 3062 PA Rotterdam, The Netherlands; and Department of Finance, McCombs School of Business, University of Texas at Austin, Austin, Texas 78712)

  • Marno Verbeek

    (Rotterdam School of Management, Erasmus University, 3062 PA Rotterdam, The Netherlands)

  • Yu Wang

    (IMC Asset Management, 1077 XX Amsterdam, The Netherlands)

Abstract

The consensus wisdom of active mutual fund managers, as reflected in their average over- and underweighting decisions, contains valuable information about future stock returns. Analyzing a comprehensive sample of active U.S. equity funds from 1984 to 2008, we find that stocks heavily overweighted by active funds outperform their underweighted counterparts by more than 7% per year, after adjustments for their loadings on the market, size, value, and momentum factors. This large premium dissipates quickly as the consensus view becomes publicly available. These results are consistent with the notion that informed investing by active mutual funds enhances the informativeness of stock prices. In addition, active mutual funds invest only a small portion of fund assets in high alpha stocks, in accordance with the consensus view that active mutual funds on average fail to outperform passive benchmarks.Data, as supplemental material, are available at http://dx.doi.org/10.1287/mnsc.2013.1847 . This paper was accepted by Brad Barber, finance.

Suggested Citation

  • Hao Jiang & Marno Verbeek & Yu Wang, 2014. "Information Content When Mutual Funds Deviate from Benchmarks," Management Science, INFORMS, vol. 60(8), pages 2038-2053, August.
    • Handle: RePEc:inm:ormnsc:v:60:y:2014:i:8:p:2038-2053
    DOI: 10.1287/mnsc.2013.1847
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    References listed on IDEAS

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    2. Raddatz, Claudio & Schmukler, Sergio L. & Williams, Tomás, 2017. "International asset allocations and capital flows: The benchmark effect," Journal of International Economics, Elsevier, vol. 108(C), pages 413-430.
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    5. Irina Bezhentseva Mateus & Cesario Mateus & Natasa Todorovic, 2019. "Benchmark-adjusted performance of US equity mutual funds and the issue of prospectus benchmarks," Journal of Asset Management, Palgrave Macmillan, vol. 20(1), pages 15-30, February.
    6. Jiang, Hao & Sun, Zheng, 2014. "Dispersion in beliefs among active mutual funds and the cross-section of stock returns," Journal of Financial Economics, Elsevier, vol. 114(2), pages 341-365.
    7. Qifei Zhu, 2020. "The Missing New Funds," Management Science, INFORMS, vol. 66(3), pages 1193-1204, March.
    8. Loban, Lidia & Sarto, José Luis & Vicente, Luis, 2020. "Eurozone regulation bias in the active share measure," International Review of Financial Analysis, Elsevier, vol. 72(C).
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    10. George J. Jiang & Tong Yao & Gulnara R. Zaynutdinova, 2023. "The effect of investor service costs on mutual fund performance," The Financial Review, Eastern Finance Association, vol. 58(1), pages 91-115, February.
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