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The investment value of mutual fund portfolio disclosure

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  • Wermers, Russ
  • Yao, Tong
  • Zhao, Jane
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    Abstract

    This paper shows that publicly disclosed mutual fund portfolio holdings have investment value. Our approach is based on the intuition that an overweighting by successful managers, or an underweighting by unsuccessful managers signals that a stock is currently underpriced. Investment strategies based on portfolio holdings, weighted by past fund performance, generate returns exceeding seven percent during the following year, adjusted for the size, book-to-market, and momentum characteristics of stocks. The return-predictive power of the models is not explained by the effect of fund herding or fund flows; rather, it is derived largely from the ability to predict firms' future operating profitability. Further, investment signals generated by the models are distinct from a large number of stock return signals documented by existing literature. Our results indicate that some fund managers have persistent skills in uncovering private information on fundamental stock values. --

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    Bibliographic Info

    Paper provided by University of Cologne, Centre for Financial Research (CFR) in its series CFR Working Papers with number 06-09.

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    Date of creation: 2007
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    Handle: RePEc:zbw:cfrwps:0609

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    1. Randolph B. Cohen & Joshua D. Coval & Lubos Pástor, 2005. "Judging Fund Managers by the Company They Keep," Journal of Finance, American Finance Association, American Finance Association, vol. 60(3), pages 1057-1096, 06.
    2. Mark Grinblatt & Sheridan Titman, . "Mutual Fund Performance: An Analysis of Quarterly Portfolio Holdings," Rodney L. White Center for Financial Research Working Papers, Wharton School Rodney L. White Center for Financial Research 23-88, Wharton School Rodney L. White Center for Financial Research.
    3. Lubos Pastor & Robert F. Stambaugh, 1998. "Costs of Equity Capital and Model Mispricing," NBER Working Papers 6490, National Bureau of Economic Research, Inc.
    4. Mary Margaret Myers & James M. Poterba & Douglas A. Shackelford, 2001. "Copycat Funds: Information Disclosure Regulation and the Returns to Active Management in the Mutual Fund Industry," NBER Working Papers 8653, National Bureau of Economic Research, Inc.
    5. Fama, Eugene F & French, Kenneth R, 1992. " The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, American Finance Association, vol. 47(2), pages 427-65, June.
    6. Erik R. Sirri & Peter Tufano, 1998. "Costly Search and Mutual Fund Flows," Journal of Finance, American Finance Association, American Finance Association, vol. 53(5), pages 1589-1622, October.
    7. Grinblatt, Mark & Titman, Sheridan & Wermers, Russ, 1995. "Momentum Investment Strategies, Portfolio Performance, and Herding: A Study of Mutual Fund Behavior," American Economic Review, American Economic Association, American Economic Association, vol. 85(5), pages 1088-1105, December.
    8. Gordon J. Alexander & Gjergji Cici & Scott Gibson, 2007. "Does Motivation Matter When Assessing Trade Performance? An Analysis of Mutual Funds," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 20(1), pages 125-150, January.
    9. Jones, Christopher S. & Shanken, Jay, 2005. "Mutual fund performance with learning across funds," Journal of Financial Economics, Elsevier, Elsevier, vol. 78(3), pages 507-552, December.
    10. Narasimhan Jegadeesh & Joonghyuk Kim & Susan D. Krische & Charles M. C. Lee, 2004. "Analyzing the Analysts: When Do Recommendations Add Value?," Journal of Finance, American Finance Association, American Finance Association, vol. 59(3), pages 1083-1124, 06.
    11. Russ Wermers, 1999. "Mutual Fund Herding and the Impact on Stock Prices," Journal of Finance, American Finance Association, American Finance Association, vol. 54(2), pages 581-622, 04.
    12. Pastor, Lubos & Stambaugh, Robert F., 2002. "Mutual fund performance and seemingly unrelated assets," Journal of Financial Economics, Elsevier, Elsevier, vol. 63(3), pages 315-349, March.
    13. Russ Wermers, 2000. "Mutual Fund Performance: An Empirical Decomposition into Stock-Picking Talent, Style, Transactions Costs, and Expenses," Journal of Finance, American Finance Association, American Finance Association, vol. 55(4), pages 1655-1703, 08.
    14. Grinblatt, Mark & Titman, Sheridan, 1992. " The Persistence of Mutual Fund Performance," Journal of Finance, American Finance Association, American Finance Association, vol. 47(5), pages 1977-84, December.
    15. Chen, Joseph & Hong, Harrison & Stein, Jeremy C., 2002. "Breadth of ownership and stock returns," Journal of Financial Economics, Elsevier, Elsevier, vol. 66(2-3), pages 171-205.
    16. Lakonishok, Josef & Shleifer, Andrei & Vishny, Robert W., 1992. "The impact of institutional trading on stock prices," Journal of Financial Economics, Elsevier, Elsevier, vol. 32(1), pages 23-43, August.
    17. Shumway, Tyler, 1997. " The Delisting Bias in CRSP Data," Journal of Finance, American Finance Association, American Finance Association, vol. 52(1), pages 327-40, March.
    18. Almazan, Andres & Brown, Keith C. & Carlson, Murray & Chapman, David A., 2004. "Why constrain your mutual fund manager?," Journal of Financial Economics, Elsevier, Elsevier, vol. 73(2), pages 289-321, August.
    19. Carhart, Mark M, 1997. " On Persistence in Mutual Fund Performance," Journal of Finance, American Finance Association, American Finance Association, vol. 52(1), pages 57-82, March.
    20. Jensen, Michael C, 1969. "Risk, The Pricing of Capital Assets, and the Evaluation of Investment Portfolios," The Journal of Business, University of Chicago Press, vol. 42(2), pages 167-247, April.
    21. Marcin Kacperczyk & Clemens Sialm & Lu Zheng, 2005. "On the Industry Concentration of Actively Managed Equity Mutual Funds," Journal of Finance, American Finance Association, American Finance Association, vol. 60(4), pages 1983-2011, 08.
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