New Positions in Mutual Fund Portfolios: Implications for Fund Alpha
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New Positions in Mutual Fund Portfolios: Implications for Fund Alpha Viktoriya Lantushenko1 · Edward Nelling2 Received: 23 December 2018 / Revised: 25 October 2019 / Accepted: 4 December 2019 / © Springer Science+Business Media, LLC, part of Springer Nature 2020
Abstract This study introduces a new measure of fund activeness that predicts future fund abnormal returns. This measure is defined as the “return on new portfolio holdings.” It is constructed as the return on stocks that a fund has not held before. We find that the return on these positions drives future fund alpha. On average, a one-standard deviation increase in the return on new holdings increases fund alpha by approximately 0.39 to 0.49 percent per year. Overall, our findings provide new insights on the value of active management. Keywords Mutual funds · Institutional investors · Fund alpha JEL Classification G110 · G230
1 Introduction A number of studies provide evidence that mutual fund performance is enhanced by active management.1 In this study, we examine the effect of adding new positions to a fund. We propose that the evaluation of portfolio positions towards which fund managers are likely to exert more effort and conviction can provide insights regarding the quality of active management. We focus on new positions because managers are likely to devote more of
1 See, for example, Chen et al. (2000), Kacperczyk et al. (2005), Kacperczyk et al. (2008), Cremers and Petajisto (2009), Amihud and Goyenko (2013).
Edward Nelling
[email protected] Viktoriya Lantushenko [email protected] 1
Haub School of Business, Saint Joseph’s University, 239 Mandeville Hall, 5600 City Avenue, Philadelphia, PA 19131, USA
2
LeBow College of Business, Drexel University, 1144 Gerri C. LeBow Hall, 3220 Market Street, Philadelphia, PA 19104, USA
Journal of Financial Services Research
their attention and effort to new holdings than to existing positions. We find that the performance of new holdings, and not the return on existing positions, is strongly and positively associated with future fund performance. To add a new position, managers have to evaluate the qualities of the potential investment. They may need to conduct a comprehensive analysis of a company’s industrial environment, its competitors, its customers and suppliers, its governance structure, other factors, and derive a proper valuation to justify investment. One can argue that the amount of effort dedicated to the process of introducing a new stock is more intensive than it is for updating expectations for existing portfolio holdings. As a result, the introduction of new holdings may represent greater conviction by a fund manager than incremental portfolio changes to existing positions, and the performance of new positions can provide a signal of managerial ability. Compared to existing holdings, trading in new positions may be motivated differently. For example, a simple response to fund inflows would be to scale up existing positions. Such marginal portfolio changes are unlikely to be driven by informa
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