Using Fund Holdings to Identify Stock Selection Skill

Summary

This report summary describes a fund-selection approach that uses portfolio holdings to estimate managers’ stock-picking and market-timing abilities. Holdings provide information for attributing and forecasting performance that is not available from fund net asset values alone. The researchers construct measures of both abilities and look for funds whose measured skill is statistically significant and stable.

The reported findings say that relatively few funds pass the stability and significance screens. The authors also account for false positives with an FDA-based method, estimating that more than one fifth of funds that pass may owe their apparent skill to luck. In the reported fund-selection strategy, funds with stable stock-selection ability outperform peer averages on annualized return and excess return, while funds classified as market timers do not significantly outperform peers. These results are summaries of the cited study; the underlying report and its data, sample design, measurement choices, and robustness checks are not included here, so the figures should not be treated as universal or current forecasts.

Key ideas

• The approach uses fund holdings to measure stock-selection and market-timing ability.
• It screens for abilities that are both statistically significant and stable.
• The summary warns that false positives can cause funds to appear skilled by chance.
• Funds identified for stable stock-selection skill outperform peer averages in the reported results.
• The timing screen does not yield significant peer outperformance in the summary.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.