Excess Return Profiles for Stocks Purchased by Equity Managers

We demonstrate how forming time profiles of the excess returns on stocks purchased by active equity funds reveals the horizon and magnitude of value-add from investment signals. This provides insights into the nature of those signals and how they might be best implemented. We illustrate the approach for both individual funds and categories of funds, showing that purchases by small-cap funds and value funds deliver outperformance versus their style benchmarks that accrues over long horizons, while purchases by growth funds and high-turnover funds outperform their style benchmarks over shorter horizons. Our analysis also highlights the importance of benchmark choice.