Working Paper: NBER ID: w25381
Authors: Martin Lettau; Sydney C. Ludvigson; Paulo Manoel
Abstract: This paper provides a comprehensive analysis of portfolios of active mutual funds and ETFs through the lens of risk (anomaly) factors. We show that these funds do not systematically tilt their portfolios towards profitable factors, such as high book-to-market (BM) ratios, high momentum, small size, high profitability, and low investment growth. Strikingly, there are almost no high-BM funds in our sample while there are many low-BM “growth” funds. Portfolios of “growth” funds are concentrated in low BM-stocks but “value” funds hold stocks across the entire BM spectrum. In fact, most “value” funds hold a higher proportion of their portfolios in low-BM (“growth”) stocks than in high-BM (“value”) stocks. While there are some micro/small/mid-cap funds, the vast majority of mutual funds hold very large stocks. But the distributions of mutual fund momentum, profitability, and investment growth are concentrated around market average with little variation across funds. The characteristics distributions of ETFs and hedge funds do not differ significantly from those of mutual funds. We conclude that the characteristics of mutual fund portfolios raise a number of questions about why funds do not exploit well-known return premia and how their portfolio choices affect asset prices in equilibrium.
Keywords: mutual funds; ETFs; value funds; portfolio characteristics; risk anomaly factors
JEL Codes: G11; G12; G2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Mutual funds do not systematically tilt their portfolios towards profitable factors (G23) | Mutual funds hold a higher proportion of low book-to-market stocks than high book-to-market stocks (G23) |
| The bias towards low book-to-market stocks (G41) | The portfolios of growth funds are concentrated in low book-to-market stocks (G23) |
| The portfolios of growth funds are concentrated in low book-to-market stocks (G23) | Value funds hold stocks across the entire book-to-market spectrum (G23) |
| Mutual funds are on average momentum-neutral (G40) | Mutual funds do not systematically target high momentum stocks (G23) |