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Rekenthaler Report

Predicting Mutual Fund Returns With the Ownership Lens

A measure invented in 2005 gets retested--and passes with flying colors.

An Unlikely Victory
Tuesday’s column discussed a 2005 academic paper, “Judging Fund Managers by the Company They Keep.” (Journal of Finance 60, by Randolph Cohen, Joshua Coval, and Lubos Pastor.) The study found that sorting U.S. equity funds according to the quality of their portfolio holdings gave better future results than selecting funds based on their past performances.

The authors evaluated that quality by determining what other funds possessed similar stocks. If those rivals had strong track records, the fund being appraised received a high score. Conversely, if the rivals had not performed well, the fund scored poorly. Thus, the authors ultimately did rank funds according to their returns. Only those returns came from peer funds, not the fund itself.

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