Investing in mutual funds when returns are predictable

Doron Avramov*, Russ Wermers

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

149 Scopus citations

Abstract

This paper forms investment strategies in US domestic equity mutual funds, incorporating predictability in (i) manager skills, (ii) fund risk loadings, and (iii) benchmark returns. We find predictability in manager skills to be the dominant source of investment profitability-long-only strategies that incorporate such predictability outperform their Fama-French and momentum benchmarks by 2 to 4%/year by timing industries over the business cycle, and by an additional 3 to 6%/year by choosing funds that outperform their industry benchmarks. Our findings indicate that active management adds significant value, and that industries are important in locating outperforming mutual funds.

Original languageAmerican English
Pages (from-to)339-377
Number of pages39
JournalJournal of Financial Economics
Volume81
Issue number2
DOIs
StatePublished - Aug 2006
Externally publishedYes

Keywords

  • Asset allocation
  • Equity mutual funds
  • Time-varying managerial skills

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