Are mutual fund managers good gamblers?

Abstract

Lottery stocks have been shown to severely underperform on average. I find that from 1980 to 2016, while the average stock held by U.S. equity mutual fund managers outperforms those they do not hold by 3.8% per year, lottery stocks held by mutual funds outperform those they avoid by 24%. I find that a fund's loading on lottery stocks is a good predictor of future performance. Lottery stock loading is also correlated with various measures of fund manager skill. Investors can benefit from this information either to find skillful fund managers or to build a profitable copycat portfolio.