Copycat Funds: Information Disclosure Regulation and the Returns to Active Management in the Mutual Fund Industry

Current regulations require mutual funds to disclose their portfolio holdings twice yearly. For actively managed funds, disclosure tells the public which assets the manager views as undervalued. If other investors can copy the actively managed funds' investments without affecting asset values, the return on the manager's research is diminished. If buying by "copycat" investors drives up the prices of assets held by the actively managed fund, however, then the disclosing fund may benefit. This paper provides empirical evidence on one of the costs of disclosure by estimating the returns of copycat mutual funds, which purchase the same assets as actively managed funds as soon as those asset holdings are disclosed. Our results for a limited sample of high-expense funds in the 1990s suggest that while these actively managed funds earned higher returns before expenses than their associated copycat funds, after expenses copycat funds earned statistically indistinguishable, and possibly higher, returns.