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Follow the Institutional Leaders?

| | Posted in: Mutual/Hedge Funds

It should be a good idea to follow the stock-picking leads of all those smart mutual fund managers, shouldn’t it? In their paper “Stock Selection Based on Mutual Fund Holdings: Evidence from Large-Cap Funds?” of February 2004, Robert Weigand, Susan Belden and Thomas Zwirlein investigate whether small investors should value the stock weightings of mutual fund managers in assembling their own portfolios. They conclude that:

  • Stocks most heavily weighted by mutual fund managers outperform their most lightly weighted stocks over the 6- and 12-month periods before their weighting decisions are implemented. This trend reverses after the weighting decisions are in place.
  • More broadly, even professional decision-makers place too much weight on the recent past when forming their expectations regarding the future.

In summary, individual investors should be wary of investing in stocks that are the top mutual fund holdings.

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