Predicting Mutual Fund Performance : A Portfolio Commonality Approach

In order to outperform his peers, a mutual fund manager may decide to invest in stocks that are considerably different from his competitors. By investing in a unique portfolio, the fund manager has a greater chance of either outperforming or underperforming his peers than those managers who invest in a common portfolio (i.e., herding). This study finds some evidence that mutual funds with unique portfolios tend to earn higher returns on an absolute and a risk-adjusted basis, compared to funds that invest in more common portfolios. The results demonstrate some empirical supports for our hypothesis for both six-month and one-year holding periods as well as for growth and growth/income funds. We conjecture these results are consistent with the argument that fund managers investing in uncommon portfolios possess superior stock selection ability. Consequently investing in these undervalued stocks significantly improves their fund returns