An experiment with riding a mutual fund manager

[DcifrThs]

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Would you expect risk-adjusted performance to be better than the fund itself, or just performance overall? I would expect only the latter.

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Define "risk adjusted performance."

eastbay

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monthly excess reutns of fund / total fund standard deviation of monthly returns

vs.

monthly top 5 excess returns / top 5 standard deviation of monthly returns

the poster is asking whether you will get a larger increase in standard deviation (or whatever appropriate risk measure you choose) than in absolute returns.

Barron

[crazy canuck]

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Canuck,


You minimize risks more by owning the whole market than you do by owning 15 stocks? That is amazing, I can't believe no one ever thought of that before!

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Please read the article next time before you respond. If you did read it then work on your reading comprehension.

His point was that by owning 15 stocks you can indeed eliminate nonsytematic portfolio risk, however you risk missing out on certain super stocks that increase several hundred times in value. These might contribute significantly to your portfolio's earnings.

Also, about the author:

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William J. Bernstein is an American financial theorist, known for pioneering research in the field of Modern Portfolio Theory. Bernstein is also highly regarded for his self-help finance books for individual investors who wish to manage their own equity portfolios.

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[Newt_Buggs]

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eastbay,

instead of performing this experiment wouldn't it be easier to look up the top five weightings this particular mutual fund has had for the last 10 years and measure their performance against the fund's overall performance?

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I must have communicated poorly, this was sort of what I was asking in my earlier post. Basically, have you tested the hypothesis that you lay out in the OP? You could not only measure how the top 5 holdings have done against the rest of the holdings in the fund historically, but look into other successful funds as well and see how their top 5 holdings do against the rest of the fund as well as how those top 5 holdings do against the rest of the market.

[gordongecko]

Has anyone tried to backtest this "system"? I am pretty intrigued, but as someone said most 5+ baggers tend to be smaller weighted stocks that wont be anywhere near the top 5 in a huge fund. Alot of time the stocks with the most volume are also the most stable/sideways moving stocks in the fund. I am a mutual fund noob though , so perhaps someone else can pick this apart better than me.

[eastbay]

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eastbay,

instead of performing this experiment wouldn't it be easier to look up the top five weightings this particular mutual fund has had for the last 10 years and measure their performance against the fund's overall performance?

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That would not be possible considering the fund has managed by this person for three years. Nor am I using the top five weightings.

So... no.

eastbay

[eastbay]

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Would you expect risk-adjusted performance to be better than the fund itself, or just performance overall? I would expect only the latter.

[/ QUOTE ]

Define "risk adjusted performance."

eastbay

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monthly excess reutns of fund / total fund standard deviation of monthly returns

vs.

monthly top 5 excess returns / top 5 standard deviation of monthly returns


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This is not an interesting quantity to me, so the answer is: I don't care.

As a measure of risk and reward, it presumes that standard deviation is a good measure of risk, and furthermore it assumes that I should consider twice as much return to be "the same" if there is twice as high a standard deviation associated with it. Neither of which makes much sense to me and together renders the numbers pretty uninteresting indeed.

eastbay

[eastbay]

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eastbay,

instead of performing this experiment wouldn't it be easier to look up the top five weightings this particular mutual fund has had for the last 10 years and measure their performance against the fund's overall performance?

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I must have communicated poorly, this was sort of what I was asking in my earlier post. Basically, have you tested the hypothesis that you lay out in the OP?

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The hypothesis is not backtestable, because it is too discretionary. I am choosing a particular individual, who cannot be generalized to a statistically significant sample by any systematic method.

A hypothesis which is tangentially related is whether or not outperforming fund managers tend to repeat their outperformance. And I have seen convincing evidence of this phenomenon, which I believe to be consistent with common sense. Some stock pickers are better than others.

eastbay