Predictive power of mutual fund holdings on stock returns: evidence from the Korean market

The question of whether mutual funds have a superior prediction ability for future stock returns as professional investors has been an important research topic in the theory of investments. We examine the predictive power of mutual funds’ stock holdings on stock returns in the Korean market. Specifically, we conduct empirical analyses using data on the stock holdings of Korean stock mutual funds to examine whether the levels and changes of mutual funds’ stock holdings have predictive power for individual stock returns, and whether the information asymmetry of individual stocks affects the prediction ability of mutual fund holdings. The analysis results are as follows: First, the levels and changes of mutual fund holdings have statistically significant explanatory power for future stock returns. Second, the predictive power of mutual fund holdings is higher in the stocks of large firms, firms with higher foreign ownership, firms with higher return volatility and firms included in the KOSPI200 index. Third, the prediction ability of mutual fund holdings is higher during the period of positive market momentum. Fourth, the stocks where mutual funds have larger holdings or have increased their holdings exhibit higher returns.