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

Edwin J. Elton, Martin J. Gruber and Christopher R. Blake
The Journal of Financial and Quantitative Analysis
Vol. 46, No. 2 (APRIL 2011), pp. 341-367
Stable URL: http://www.jstor.org/stable/23018412
Page Count: 27
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Since scans are not currently available to screen readers, please contact JSTOR User Support for access. We'll provide a PDF copy for your screen reader.
Holdings Data, Security Returns, and the Selection of Superior Mutual Funds
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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).

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