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The Investment Value of Mutual Fund Portfolio Disclosure

Author

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  • Wermers, Russ

    (University of MD)

  • Yao, Tong

    (University of IA)

  • Zhao, Jane

    (PanAgora Asset Management, Boston, MA)

Abstract

This paper shows that publicly disclosed mutual fund portfolio holdings contain valuable information about stock fundamentals and future returns. We develop a model to efficiently aggregate this information across actively-managed funds with differential skills to predict individual stock returns. This stock-level measure, which we call the "generalized-inverse alpha" (GIA), selects portfolios of stocks that exhibit much better performance relative to a "copycat strategy" that simply mimics the stockholdings of funds. We use the GIA model to study the source of fund managers' stock selection ability, and find that some managers have skills in uncovering information from fundamental research about the future earnings of stocks. Notably, the forecasting power of our measures 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.

Suggested Citation

  • Wermers, Russ & Yao, Tong & Zhao, Jane, 2010. "The Investment Value of Mutual Fund Portfolio Disclosure," Working Papers 11-15, University of Pennsylvania, Wharton School, Weiss Center.
    • Handle: RePEc:ecl:upafin:11-15
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    File URL: http://fic.wharton.upenn.edu/fic/papers/11/11-15.pdf
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    Cited by:

    1. Lou, Dong, 2009. "A flow-based explanation for return predictability," LSE Research Online Documents on Economics 29310, London School of Economics and Political Science, LSE Library.
    2. Wahal, Sunil & Wang, Albert (Yan), 2011. "Competition among mutual funds," Journal of Financial Economics, Elsevier, vol. 99(1), pages 40-59, January.
    3. Koijen, R.S.J., 2008. "Essays on asset pricing," Other publications TiSEM 75662994-29dc-4a83-a3ff-9, Tilburg University, School of Economics and Management.
    4. Vikas Agarwal & Wei Jiang & Yuehua Tang & Baozhong Yang, 2013. "Uncovering Hedge Fund Skill from the Portfolio Holdings They Hide," Journal of Finance, American Finance Association, vol. 68(2), pages 739-783, April.
    5. Seung Hee Choi & Maneesh Chhabria, 2012. "Effective delays in portfolio disclosure," Journal of Financial Regulation and Compliance, Emerald Group Publishing Limited, vol. 20(2), pages 196-211, May.
    6. Vikas Agarwal & Kevin A. Mullally & Yuehua Tang & Baozhong Yang, 2015. "Mandatory Portfolio Disclosure, Stock Liquidity, and Mutual Fund Performance," Journal of Finance, American Finance Association, vol. 70(6), pages 2733-2776, December.
    7. Choi, Nicole & Sias, Richard W., 2009. "Institutional industry herding," Journal of Financial Economics, Elsevier, vol. 94(3), pages 469-491, December.
    8. Gregory-Allen, Russell & Balli, Hatice Ozer & Thompson, Kathleen, 2019. "The impact of portfolio holdings disclosure on fund returns," Pacific-Basin Finance Journal, Elsevier, vol. 57(C).

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