Equity Fund Competition And Profiting From The Accrual Anomaly

The discovery of accrual anomaly raises further doubt and challenge to Efficient Markets Hypothesis. Previous studies have demonstrated that accrual anomaly is a widespread phenomenon, which also exists in China’s capital market. In essence, accounting accrual is due to the result of using accrual basis. Accounting information as an important source of information for investors, the quality of accounting information has an important impact on investor decisions. Accrual as a key indicator of the quality of accounting earnings is also an important indicator of the quality of accounting information and accounting information market efficiency. The deviation of investors understanding of accounting information market efficiency results in accrual mispricing. Buying stocks with low accrual and selling stocks with high accrual is accrual arbitrage strategies.Coupled with the development of quantitative investment techniques and investment instruments, fund’s investment strategy constantly enrich and improve. Market anomaly-based investment strategies among fund have become popular in foreign capital markets, which also have become important investment criteria for fund. In China’s fund market, there has been a tremendous growth in the fund industry during the past few years, accompanied by diversify investment products and gradual use of quantitative investing techniques. The growth of fund industry in China’s capital market provides a good material for studying accrual anomaly. The popularity of anomaly-based strategies along with rapid growth in the involvement of investment professionals means competition among these investors has become increasingly relevant for the profitable implementation of quantitative equity strategies. These strategies are largely based on published market anomalies and rely on model construction and data processing. As a result, investors following such strategies often end up with very similar positions, and their collective trading can generate a large price impact, having impact on fund performance.In Chinese academics, so far there is no existing literature about accrual-based strategy among funds, characterizing the competition they face when implementing the strategy, and examining the relation between competition and fund performance. This study provides the first empirical analysis on the effect of competition on the performance of mutual funds aggressively pursuing anomaly-based trading strategies. In this paper, we select 2004-2013 equity funds and leaning stock fund and their quarterly portfolio holdings as our sample. The sample data selected are from Wind database and CCER database. We have three main findings. First, this paper provides evidence that actively managed equity funds on average do not trade on the accruals anomaly; we find that few, if any, funds trade on the anomaly; this strategy does not have a significant profitability. The results from our study show that the bottom accrual (D1) funds do not obtain a significantly higher income than INACTIVE funds. Second, we show that competition matters for cross-sectional fund performance. Among funds aggressively trading on accrual anomaly, performance is negatively correlated with a strategy-specific measure of fund competition. We also find that a subset of funds (namely, the low-competition D1 funds) manage to aggressively trade on accrual anomaly, avoid crowded trades, and generate superior performance. Their identities are persistent. The low-competition (C1) funds have a significantly higher holdings portfolio weights than high-competitive fund. Finally, we report evidence that the low-competition (C1) funds are associated with less size and higher volatility in both fund returns and fund flows relative to other funds. These undesirable effects may be one of the reasons why equity funds do not trade on the accruals anomaly aggressively.Overall, this paper puts fund investment strategies and accrual anomaly together, expanding the study of anomaly and enriching the study of market efficiency and asset pricing. At the same time, the empirical results of this paper also provide a theoretical support for the fund manager to make relevant decisions. Therefore, the results of this paper have a positive significance for theoretical research and practical activities in the future.