Mutual fund investment horizon and performance

This paper proposes several new holdings-based measures of fund investment horizon, and examines the relation between manager skills and fund holding horizon. We find that both aggregate holdings and trades of long-horizon funds are informative about superior future long-term stock returns, whereas aggregate trades, but not holdings, of short-horizon funds are associated with future short-term stock returns. Specifically, stocks that are largely held by long-term funds outperform stocks that are largely held by short-term funds by roughly 3% per year over the following five-year period. This superior performance of fund managers with long investment horizons stems from their ability to identify superior long-term firm fundamentals. In contrast, short-term funds predict short-term earnings or use simple mechanical strategies, such as momentum strategies, to select stocks.