One wonders whether such past anomalies found as the "the accrual anomaly" based on large accruals in non-cash assets, like inventory and receiveables, which are manipulatable, that flow into earnings are overstating the persistent ability to profit, such as this,  are still profitable. A quote in Malkiel–, "I have never seen a back test that I didn't love, but devil take the hindmost when you try to use it" comes to mind, but such studies that look at the balance sheets seem less likely to have been exploited.

Paul Hendry comments: 

The basic thrust of the paper is that individual equity investors with limited attention are fixated on accounting profitability while neglecting cashflow profitability. The primary cause of mispricing is the net operating assets anomaly or "balance sheet bloat".

Reading over this 50 page study which is highly technical but has a few interesting points:

-They do not believe that mutual funds who identify the mispricing take out all the arbitrage opportunity.
-Most equities with high accruals on the books are typically small size, low price, low liquidity but high systematic risk. Traits not appealing to funds.
-High institutional ownership reduces accrual mispricing.
-Growth orientated mutual funds outperform benchmarks.
-Funds that concentrate of fewer industries perform better after adjusting for risks and styles.
-In general, mutual funds underperform the market by 0.6% to 1%. Transactions costs are significant.

If you accepted their findings then a mutual fund investor should go into an aggressive growth fund, that goes both long and short, low transaction costs, specializing in one or few industries. To capture the mispricing would take consistent analysis that a fund has the resources to do..


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