The Predictive Power of Portfolio Characteristics

Abstract

In order to predict future relative results within a universe of equity portfolios, the authors hypothesize that it is possible to use selected portfolio characteristics as opposed to relying on past performance. This research uses Active Share and Concentration Coefficient data for universes of US, international, and global equity mutual fund portfolios to develop a method of predicting the future relative ranking of the portfolios’ information ratios. The predictive power of this approach appears statistically significant for the five-year period of 2009-2013, but not during the financial crisis years of 2007-2008. The authors believe these results are indicative of the usefulness of this approach, but not conclusive due to the limited time frame (seven years of data) and universe (174 funds). The authors invite collaboration for further research.

Keywords: active share, concentration coefficient, information ratio, predicting fund performance, mutual funds, Fundamental Law of Active Management

JEL Classification: C13, N20, G1, G2