Stock Selection Based on Mutual Fund Holdings

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Academics have investigated whether individual investors should consider the weightings mutual fund managers place on the stocks held in their funds when making stock selection decisions (Weigand et al., 1973). Specifically, they compare the performance of the stocks that are most heavily weighted in mutual funds vs. the stocks that are most lightly weighted. These studies find that the heavily weighted stocks in mutual funds perform no better than, and sometimes significantly underperform, the most lightly weighted stocks. These results contradict the idea that individual investors can earn excess returns by following the implicit stock selection picks of mutual fund managers, particularly, short-term and momentum investors who trade large-cap stocks. These findings rather suggest that individual investors should be wary of investing in stocks that are the top holdings in general equity mutual funds.

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