Stock selection based on mutual fund holdings
Evidence from large-cap funds
DOI:
https://doi.org/10.61190/fsr.v13i2.4789Keywords:
Mutual funds, Information and market efficiency, Portfolio choiceAbstract
In this study, we investigate whether individual investors should consider the weightings mutual fund managers place on the stocks held in their funds when making stock selection decisions. Specifically, we compare the performance of the stocks that are most heavily weighted in mutual funds versus the stocks that are most lightly weighted. We find that the heavily weighted stocks in mutual funds perform no better than, and sometimes significantly underperform, the most lightly weighted stocks. These results contradict the idea that individual investors can earn excess returns by following the implicit stock selection picks of mutual fund managers-particularly short-term and momentum investors who trade large-cap stocks. Our findings rather suggest that individual investors should be wary of investing in stocks that are the top holdings in general equity mutual funds.
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Copyright (c) 2004 Academy of Financial Services
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