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Holdings Data, Security Returns, and the Selection of Superior Mutual Funds

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  • Elton, Edwin J.
  • Gruber, Martin J.
  • Blake, Christopher R.

Abstract

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 Securities and Exchange Commission’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 macroeconomic 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).

Suggested Citation

  • Elton, Edwin J. & Gruber, Martin J. & Blake, Christopher R., 2011. "Holdings Data, Security Returns, and the Selection of Superior Mutual Funds," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 46(02), pages 341-367, April.
  • Handle: RePEc:cup:jfinqa:v:46:y:2011:i:02:p:341-367_00
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    Cited by:

    1. Anastasia Petraki & Anna Zalewska, 2017. "Jumping over a low hurdle: personal pension fund performance," Review of Quantitative Finance and Accounting, Springer, vol. 48(1), pages 153-190, January.
    2. Ferson, Wayne & Mo, Haitao, 2016. "Performance measurement with selectivity, market and volatility timing," Journal of Financial Economics, Elsevier, vol. 121(1), pages 93-110.
    3. Choi, Jaewon & Richardson, Matthew, 2016. "The volatility of a firm's assets and the leverage effect," Journal of Financial Economics, Elsevier, vol. 121(2), pages 254-277.
    4. repec:aea:jecper:v:32:y:2018:i:1:p:135-54 is not listed on IDEAS
    5. repec:bla:acctfi:v:57:y:2017:i:1:p:113-129 is not listed on IDEAS
    6. repec:bla:acctfi:v:57:y:2017:i::p:101-116 is not listed on IDEAS
    7. Cao, Charles & Iliev, Peter & Velthuis, Raisa, 2017. "Style drift: Evidence from small-cap mutual funds," Journal of Banking & Finance, Elsevier, vol. 78(C), pages 42-57.
    8. Elton, Edwin J. & Gruber, Martin J., 2013. "Mutual Funds," Handbook of the Economics of Finance, Elsevier.

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