Do Fund Managers Make Informed Asset Allocation Decisions?

Abstract

Based on a dynamic model of informed asset allocation, we identify a holdings-based measure of a manager's forecast for future market returns. The model also predicts that the variance of this measure should be indicative of a manager's ability: The higher the variance, the greater the ability. We test these predictions on a large dataset of mutual fund domestic equity holdings and find strong evidence that, across mutual fund managers, our holdings-based measure appears to contain information for future market returns. Moreover, as the model predicts, where timing ability can be detected the variability of our measure is positively related to timing ability.