Do clones of mutual funds derived from SEC filings do as well as the funds themselves? In their February 2010 preliminary paper entitled “Better than the Original? The Relative Success of Copycat Funds”, Yu Wang and Marno Verbeek construct hypothetical clones to investigate the performance of a free-riding strategy that duplicates the disclosed asset holdings of actively managed mutual funds, reformed on each filing date. Using periodically disclosed holdings of 3,046 active U.S. mutual funds during 1985-2008 (24 years), they find that:
- On average, clones marginally outperform their target mutual funds by 0.02% per month, net of estimated trading costs and expenses.
- The relative success of clones increased after the SEC began requiring more frequent portfolio disclosure in 2004 (by about 0.05% per month for a subsample of mutual funds that span the regulatory change).
- Clones of past winning funds on average outperform most active mutual funds (but not their target funds), perhaps as cheap momentum strategies.
- Clones of funds with current holdings that are consistent with their past investing styles (small tracking errors relative to characteristic-based benchmarks) tend to outperform both their targets and most active funds.
In summary, evidence indicates that cloning winning mutual funds with consistent styles may be an attractive stock-picking strategy.
Cost estimates are probably low for individuals attempting to construct mutual fund clones via relatively small positions.
