Forecasting Stock Returns through An Efficient Aggregation of Mutual Fund Holdings

Review of Financial Studies, Forthcoming

AFA 2007 Chicago Meetings Paper

50 Pages Posted: 19 Mar 2006 Last revised: 17 Jul 2012

Russ Wermers

University of Maryland - Robert H. Smith School of Business

Tong Yao

University of Iowa - Henry B. Tippie College of Business

Jane Zhao

PanAgora Asset Management; University of Arizona - Eller College of Management

Date Written: July 1, 2012

Abstract

We develop a stock return-predictive measure based on an efficient aggregation of the portfolio holdings of all actively managed U.S. domestic equity mutual funds, and use this model to study the source of fund managers' stock-selection abilities. This "generalized-inverse alpha" (GIA) approach reveals differences in the ability of managers to predict firms' future earnings from fundamental research. Notably, the GIA's return-forecasting power is not subsumed by publicly available quantitative predictors, such as momentum, value, and earnings quality, nor is it subsumed by methods shown in past research to forecast stock returns using fund holdings or trades.

Keywords: mutual funds, performance persistence, portfolio disclosure, stock selection

JEL Classification: G12, G14

Suggested Citation

Wermers, Russ and Yao, Tong and Zhao, Jane, Forecasting Stock Returns through An Efficient Aggregation of Mutual Fund Holdings (July 1, 2012). Review of Financial Studies, Forthcoming; AFA 2007 Chicago Meetings Paper. Available at SSRN: https://ssrn.com/abstract=891728 or http://dx.doi.org/10.2139/ssrn.891728

Russell R. Wermers

University of Maryland - Robert H. Smith School of Business ( email )

Department of Finance
College Park, MD 20742-1815
United States
301-405-0572 (Phone)
301-405-0359 (Fax)

HOME PAGE: http://www.rhsmith.umd.edu/finance/rwermers/

Tong Yao (Contact Author)

University of Iowa - Henry B. Tippie College of Business ( email )

Acquisitions
5020 Main Library
Iowa City, IA 52242-1000
United States

Jane Zhao

PanAgora Asset Management ( email )

260 Franklin Street
Boston, MA 02110
United States

University of Arizona - Eller College of Management ( email )

McClelland Hall
P.O. Box 210108
Tucson, AZ 85721-0108
United States

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