Holdings Data, Security Returns and the Selection of Superior Mutual Funds
59 Pages Posted: 21 Feb 2007 Last revised: 10 Mar 2010
Date Written: July 8, 2009
In this paper we show that selecting mutual funds using alpha computed from a fund’s holdings and security betas produces better future alphas than selecting funds using alpha computed from a time series regression on fund returns. This is true whether future alphas are computed using holdings and security betas or a time series regression on fund returns. Furthermore, we show that the more frequently the holdings data are available, the greater the benefit. This has major implications for the SEC’s recent ruling on the frequency of holdings disclosure and the information plan sponsors should collect from portfolio managers. We also explore the effect of conditioning betas on macro variables as suggested by Ferson and Schadt (1996) to identify superior-performing mutual funds as well as the alternative way of employing holdings data proposed by Grinblatt and Titman (1993).
Keywords: mutual funds, portfolios, composition, performance prediction
JEL Classification: G11, G12
Suggested Citation: Suggested Citation