by Mebane Faber
Before we built AlphaClone, I recall having a conversation with a big fund of funds manager (FOF). He stated that he liked the concept in theory, but had one reservation. From his experience, the top holding, as measured by the % of portfolio, was NOT the manager's best idea. He argued that this position likely got to this point by default - it simply was likely one of the top performing stocks and thus grew to take up a larger part of the portfolio (somewhat resembling a market cap weighted index).
I had mixed feelings about the analysis - I countered that if a manager didn't like the idea there was no way he would let it dominate the portfolio in size. But, as always, I was willing to defer my opinion and let the data speak for itself.
Below we examined all funds in the AlphaClone database that have performance histories all the way back to 2000. I then simply took the average performance of all the clones based on five different portfolio strategies. Taking the Top 1 holding, the Top 3, etc. What we found was that:
- Hedge funds have better performance than the institutional funds.
- The FOF manager was right - the top holdings regularly underperform the other stock picks.
|
|
Top 1 |
Top 3 |
Top 5 |
Top 10 |
Top 20 |
|
All |
-3.85% |
-1.38% |
-0.93% |
-0.59% |
0.64% |
|
Hedge Funds |
-4.12 |
-0.09 |
-1.27 |
1.10 |
2.07 |
|
Institutional Funds |
-3.67 |
-2.24 |
-0.70 |
-1.43 |
-0.32 |
We then did an analysis with the 10 funds that that had the highest performing top20 holdings clones. For the ten funds, we examined the average performance of the Top1, Top5 and Top20 holding clones. We found similar results, namely that most of the performance came from the smaller positions.
|
Top20 |
10.57% |
|
Top5 |
8.72 |
|
Top1 |
2.89 |
Given the above analysis it makes sense to allow our users to select the holdings they want to clone so instead of top ten holdings they would be able to clone holding positions 3 through 10 or 5 through 15. You can guess that this feature is high on our "to do" list. Stay tuned but it is this kind of analysis that highlights why AlphaClone is so essential to investors who track and follow professional managers - our backtests are the difference between blind and intelligent investing.
