Mutual Funds and the Asset Growth Anomaly

Abstract

This paper examines whether actively managed mutual funds exploit the asset growth anomaly in the U.S. stock market. Using data on mutual funds stock holdings and fund returns for the period of 1985 - 2012, I find that mutual funds do not generally trade on and profit from the asset growth signal. Few mutual funds persistently invest in low growth stocks and enjoy higher fund returns. I further explore possible explanations why mutual funds do not trade on the asset growth anomaly. Higher return volatilities or idiosyncratic risks do not appear to explain why actively managed mutual funds do not trade on the asset growth anomaly. Analysts more favorable recommendations toward high growth stocks hinder mutual funds from implementing the strategy. Overall, the findings shed light on our understanding of the persistence of the asset growth anomaly.