The Value of Alpha Forecasts in Portfolio Construction

Abstract

This study examines a portfolio strategy which selects stocks using the undisclosed monthly holdings of Australian active fund managers. When considering a large range of strategies incorporating fund portfolio holdings information, the top performing strategies are robust to data-snooping and are both economically and statistically significant. These strategies are short term in nature, with significant performance lasting up to two months. However, when we account for look-ahead bias in the formation of a strategy, we document the absence of statistically significant performance. When we consider a strategy following the best performing strategy holding 20 stocks or more in the previous month, we find statistically significant alpha of at least 6.88 percent per year.

Keywords: Portfolio construction, Fund mimicking strategies

JEL Classification: G11, G23