Fundamental Analysis, Mutual Fund Trading and Fund Performance

In this paper, we measure the fundamental analysis skills of mutual funds by their ability to use the value-to-price (V/P) ratio in stock trading, where value is estimated using a residual income model. We find that on average, mutual funds tend to buy (sell) high (low) V/P stocks. However, mutual funds exhibit great variations in fundamental analysis skills. Our evidence suggests that active funds, long-horizon oriented funds or funds with good past performance are more likely to hold high V/P stocks. We also show that fund managers with the best fundamental analysis skills generate significantly positive risk-adjusted returns.