Identifying Best Ideas in Iranian Mutual Funds

ObjectiveBest ideas refer to trades within mutual funds that are driven by the goal of outperforming the index and are primarily based on expert analysis. According to the extant literature, in this study, we use four measures to detect the best ideas in mutual funds trading activities. By comparing the performance of the best ideas detected by these measures, in this paper, we identify the best method to define the best ideas. Our findings demonstrate that the best ideas yield higher profits than other trading strategies. MethodsBased on the existing literature, we choose four methods to define the best ideas, (1) common trades, (2) aggressive positions, (3) consensus wisdom, and (4) innovational trades. Common trades, introduced by Pomorski (2009), are common trades of funds managed by the same company’s management. Aggressive positions mentioned by Antón et al. (2020), are the top three stocks with the highest weight difference from the market index in the mutual fund portfolio. Consensus wisdom, as introduced by Jiang et al. (2014), refers to the upper decile of average overweighted stocks among all funds, and is considered a measure of the collective expertise of active mutual fund managers. Innovational trades, introduced by Lantushenko (2015), are completely new portfolio positions that a fund has not previously held. To calculate the performance of the best ideas, we create a unique portfolio containing the best ideas. Each month, new best ideas are added to the portfolio, and after one month, they are removed from it. Finally, we use CAPM, Fama-French, and Carhart alphas to measure the portfolio's performance. ResultsBy comparing the performance of the portfolios created by the four mentioned methods, “common trades of funds from the same company” is recognized as the best method of defining the best ideas. Also, results show that the portfolio containing the common trades as best ideas can generate an alpha of 4 to 5.1 percent with a T-statistic of 2.641 to 5.329. Specifically, we test our results across two distinct market periods: before July 2020, when the market experienced aggressive growth, and after July 2020, when the market stabilized. Our findings demonstrate robustness in both periods. Common trades of funds in unrelated management companies are fundamentally different from those with the same company, this paper shows that trades made commonly in funds that are in unrelated management companies fail to generate economically positive and statistically significant alphas. In the following, we demonstrate that the performance of best ideas is not driven by the speculative behavior of funds. Additionally, we show that fund herding does not account for the abnormal returns of best ideas. ConclusionResults show that the best ideas detected by the common trades method can generate a meaningful and positive alpha (statistically and economically), independent of size (SMB), market value (HML), and momentum (UMD) factors. Finally, the common trades of funds from the same company serve as the best measure for defining the best ideas in Iran's stock exchange.