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Forecasting Stock Returns Through an Efficient Aggregation of Mutual Fund Holdings

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  • Russ Wermers
  • Tong Yao
  • Jane Zhao

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. The Author 2012. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oup.com., Oxford University Press.

Suggested Citation

  • Russ Wermers & Tong Yao & Jane Zhao, 2012. "Forecasting Stock Returns Through an Efficient Aggregation of Mutual Fund Holdings," The Review of Financial Studies, Society for Financial Studies, vol. 25(12), pages 3490-3529.
    • Handle: RePEc:oup:rfinst:v:25:y:2012:i:12:p:3490-3529
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    File URL: http://hdl.handle.net/10.1093/rfs/hhs111
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