This month’s issue of Value Investor Insight explores the results of a study conducted by professors at the Harvard Business School and the London School of Economics on the stock returns of professional money managers.
The authors find that the stock that active managers display the most conviction towards tends to outperform the market, as well as the other stocks in those managers’ portfolios, by approximately one to four percent per quarter depending on the benchmark employed. The results for managers’ other high-conviction investments (e.g. top five stocks) are also strong. The other stocks managers hold do not exhibit significant outperformance.
According to the authors, this leads to two conclusions. First, the U.S. stock market does not appear to be efficiently priced, since even the typical active mutual fund manager is able to identify stocks that outperform by economically and statistically large amounts. Second, consistent with the view of several prominent value investors, the organization of the money management industry appears to make it optimal for managers to introduce stocks into their portfolio that are not outperformers. Therefore, investors would benefit if managers held more concentrated portfolios.
The study can be downloaded here.