A Panel Regression Approach to Holdings-Based Fund Performance Measures

Abstract

Portfolio performance measures using holdings data are panel regressions. The returns of a fund’s stocks are regressed on its lagged portfolio weights. Stock fixed effects isolate average performance from time-series predictive ability. Control variables condition for fund performance on the characteristics of the stocks held. The long-term performance of average holdings drives some of the classical measures, while predictive ability drives others. A “buy-and-hold drift,” where portfolio weights increase over time in the higher alpha stocks, affects performance measures. Investor flows respond to average performance net of the buy-and-hold drift. (JEL G11, G14, G23, G29). Received September 3, 2020; editorial decision January 25, 2021 by Thierry Foucault. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.