Feb

6

I currently monitor how many managers beat the relevant indexes every quarter. It appears to be surprisingly cyclical. For 2006, most managers (defined by separate accounts in the PSN database ) underperformed the indices. In fact, in many categories only 20% of managers beat their indices. The issue, though, is finding an explanation for this. What is it about the average separate account manager that he underperformed this year?

I postulate trend following. Most managers outperformed in some prior years, and I wonder if perhaps a trend following instinct leads them all to be overweight in, say, oil compared to the indices, and then oil breaks and they all get hit hard.

I suspect the fund flow out of active managers differs from the fund flow into ETFs. If someone withdraws money from a manager who closely tracks the S&P 500 and puts it into an SPY, there will not be any change in the outperformance of managers vs. the index.

Perhaps, though, the ETFs are representing a total allocation that is different from all the active managers combined. Active managers must hold a significant, say, a few percent at least, of stocks that aren't covered by the better-known indices, and these holdings are hurting them.

This should be testable in various ways. For example, stocks that are more heavily overlapped in indices should be outperforming now.

Alston Mabry replies: 

Portfolio-weighting may play a role, too, as it interacts with changes in the small cap/large cap cycle. Indices are cap-weighted, so in order to produce a return different from the index, a fund portfolio must move some distance away from the cap-weighted index, towards equal - or random - weighted portfolios. When small cap/midcap stocks are doing well relative to large caps, there's a greater chance that an equal/random - weighted portfolio will beat the S&P. The reverse is true when large caps are the best performers.

I'm conflating funds that would say they have different benchmarks (large, mid, small, value, growth); but I would think that the analysis holds up even when restricted to subsets of stocks.

 


Comments

Name

Email

Website

Speak your mind

Archives

Resources & Links

Search