[from brknews] A new study has taken a big step forward, suggesting a selection method so easy and direct that investors can only wonder why it hasn't received more attention. The idea is to compare each fund's returns with how it would have performed had it simply held, without trading, the stocks it listed in its most recent public disclosure.
The study was done by three finance professors: Marcin Kacperczyk, of the University of British Columbia, and Clemens Sialm and Lu Zheng of the University of Michigan. They focused on what they called the return gap: the difference between a fund's actual returns and what it would have earned had it stuck with its most recently listed holdings. The SEC requires that funds make such disclosures twice a year; the professors report that nearly half of all funds do so at least quarterly.
The study found that, on average, funds with consistently positive return gaps were much better bets for future performance than those that were consistently negative, regardless of the frequency of portfolio disclosures. They analyzed more than 2,500 domestic equity mutual funds over a 20-year period - 1984 through 2003.
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