Using stock characteristics to classify fund holdings into style segments, and peer group holdings as benchmarks to define active fund holdings, we introduce a new measure, stock investment quality, to infer information about future stock returns from the active fund holdings by skilled managers. Stocks ranked high on investment quality generate significantly higher excess market returns that persist through the ensuing year. The positive investment quality–future return relationship is robust to fund quality proxied by GVA or management fees. Future returns are highest on stock holdings of skillful and patient fund managers who exploit long term market mispricing.​

Keywords: Investment quality; Forecast stock returns; Fund quality; Active management; Turnover.
JEL classification: G10; G11; G12; G14.