[MUSIC] So in the mutual fund domain, is there any good information behind the mutual fund managers stock picks? So there's strong evidence that actively managed equity mutual funds on average, underperform their benchmark after fees. That kind of seems to be clear across, study after study. And they did not seem to outperform their benchmark, before fees. This could be consistent with, for example, market efficiency. That you shouldn't be able to predict future stock price movements, except those that are associated with a kind of risk, so maybe that's not a surprising result. We had a similar result for individual investors,that they didn't seem to out perform their benchmark before trading calls. They had an alpha zero. That seems to be the case when you look at kind of the aggregate in the mutual fund industry as well. But this does not imply that there aren't some parts of the mutual fund holdings that perform well on average. Obviously, it's not the whole portfolio, else that would show up in that 2010 Fama-French result that we talked about earlier in the module. But maybe there's some subsets of the mutual fund holdings that actually do well on average. The key question is, can we identify odd, priory, or ahead of time, what part of mutual fund manager's portfolio are more likely to be based on good information than the typical holding. That's the key question, we can maybe do some analysis of this, because mutual funds do have to disclose their holdings on a quarterly basis, every three months, to the SEC. So for example, I'm reporting my holdings as of December 31st, as of March 31st, as of June 30th, as of September 30th, and these reports are required to be filed with the SEC within 60 days of the end of the quarter. So if the end of the quarter is December 31st, I'm filing this report as a mutual fund with the SEC by the end of February, 60 days after the end of the quarter. Thus, a little more than two months after the end of the prior quarter, the public is aware of what the mutual fund was holding at the end of the prior quarter. So the mutual fund holdings as of December 31st, 2015, should be available for the public to see around the end of February or the beginning of March of 2016. So let's think about that. Le Penseur's thinking, that's always a hit that time for you to put on your thinking cap as well. Based on empirical research presented earlier in Module 4, is a strategy that mimics all of the holdings reported by mutual funds in their quarterly report likely to yield positive ALPHA to these copy-cat investors. So your idea is, as soon as the mutual funds disclose their holdings, I just copy them 100%, so I invest the same portfolio weights in all the stocks that mutual funds are investing in, what's likely to be my alpha from that strategy? So think about that then I'll give you my tip. So what did you come up with? Based on the research we presented earlier in the module, the answer is no, there shouldn't be any ALPHA. We know that mutual fund managers aren't outperforming their benchmark in aggregate, so if we just mimic all their holdings, our alpha should be basically close to zero from that. But we don't have to necessarily mimic all their holdings. Maybe there's some holdings we think are more likely to be based on good information than others. So here's an example of a mutual fund holdings report. That we as a researcher and investor could go in and look, download from the SEC EDGAR website. So here, what's the period of the report? It's December 31st of 2015. The filing date when this was filed, was February 26th of 2016. Remember you have to file within sixty days of the end of the period that you're reporting your holdings, and this is a quarterly holdings for the Fidelity Magellan Fund. So let's look at what these holdings, and you can see General Motors, Tesla, going down the list, wow I'm starting to get hungry here like Domino's Pizza, Papa John's, Starbucks, like stop the video now, we need like a break okay, I think I can make it through. We're almost done, but it is getting time for lunch here. So we have all these holdings for Fidelity Magellan Fund. Do we think, once we see all these holdings as of December 31st and we get access to them maybe the end of February, early March, any of these holdings that make sense for us to mimic and then others we should simply ignore. So let's actually think about this. Pause, think, and answer time. Suppose you've downloaded all of these end-of-quarter reports, not just for Fidelity Magellan fund, but for all actively-managed funds. What holdings would you especially wish to copy going forward? So in other words, which holdings are most likely to reflect good information, on the part of the mutual fund manager. You probably just don't want to copy the whole report, but maybe there are certain holdings that you think, that likely reflects good information. Let me follow that holding. So think about that and I'll give you some kind of ideas I have regarding these questions. So what did you come up with? Are you ready to start searching for alpha? I'll go over some academic research that looks at two possible areas where we might find that elusive alpha. Local investments made by mutual fund managers. So our mutual fund manager in Boston, do they have any insight behind kind of investments in Boston companies? And a mutual fund manager in Houston, do they have more information in their Houston stock picks? And then, also, let's look for holdings that are likely to represent a network, an information network connection, or a relationship perhaps, between the mutual fund manager and the executives of the firm, that the mutual fund manager has invested in. So let's kind of do our search for ALPHA right now. [SOUND]