An experiment with riding a mutual fund manager

[Tupacia]

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

[maxtower]

Are you able to screen for stocks that might be weighted higher because of a recent run? For instance, he bought stock ABC at 1% weighting, and it went on a tear and is now 2% but possibly overpriced?

[crazy canuck]

Here is an interesting link regarding the number of stocks one should have in a portfolio:

The 15-Stock Diversification Myth

The conclusion:

[ QUOTE ]


If the O’Neal data are generalizable to stocks, and I believe that they are, then even 100 stocks are not nearly enough to eliminate this very important source of financial risk.

So, yes, you can eliminate nonsytematic portfolio risk, as defined by Modern Portfolio Theory, with a relatively few stocks. It’s just that nonsystematic risk is only a small part of the puzzle. Fifteen stocks is not enough. Thirty is not enough. Even 200 is not enough. The only way to truly minimize the risks of stock ownership is by owning the whole market.

[/ QUOTE ]

[meditate89]

canuck... this thread is about mutual funds.

why come in and post that everyone should only buy index funds? efficient market theory is clearly wrong... yet people keep trying to turn every other thread in this forum into a debate about it...

15 stocks is more than enough diworsification... why wouldn't i want to put as much money as possible into my BEST ideas, which have what I perceive to be the highest EV? Spreading it around into a bunch of mediocre ideas isn't appealing. Do you know anyone who got rich off of their 7th best idea? Or their 200th best idea?

[emon87]

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!

[edtost]

[ QUOTE ]
Here is an interesting link regarding the number of stocks one should have in a portfolio:

The 15-Stock Diversification Myth

The conclusion:

[ QUOTE ]


If the O’Neal data are generalizable to stocks, and I believe that they are, then even 100 stocks are not nearly enough to eliminate this very important source of financial risk.

So, yes, you can eliminate nonsytematic portfolio risk, as defined by Modern Portfolio Theory, with a relatively few stocks. It’s just that nonsystematic risk is only a small part of the puzzle. Fifteen stocks is not enough. Thirty is not enough. Even 200 is not enough. The only way to truly minimize the risks of stock ownership is by owning the whole market.

[/ QUOTE ]

[/ QUOTE ]

note: i did not actually read the article, and my comments are going to be very nerdy/academic.

min {risk} is not our optimization. what we are really trying to do is something like max {E[return] - execution cost} subject to {risk <= c}, where {risk} is whatever arbitrary risk measure you want to use, usually std dev, but often VaR or something relating to portfolio drawdown.

The issue here is that the number of stocks owned impacts all 3 factors (return, cost, and risk) to varying degrees. The standard argument, I think, is that impact on tcost (for individual investors) is negligible at most levels, and that after 15 stocks or so, the reduction in E[r] outweighs the reduction in risk for most people's utility functions.

edit: ok, curiostiy bit me while i was writing this up and i decided to go read it. i have a couple of issues: first, "kurtoskewness" and "TWD" are completely foreign words (to me at least) being used to describe basic phenomena, which is my first clue that these guys are FOS. also, they randomly choose portfolios of 15 stocks for their analysis, while the entire argument behind using only 15 stocks in the first place was that you could make better choices than when you invested in more, and were able to boost your E[r] more than you increased risk.

Basically, imo, the guys who wrote this are at best slightly dumb and out-of-touch, but more likely publish-or-perish academics with no real ideas who are putting out something misleading for the sake of putting something out, which is much worse.

[eastbay]

[ QUOTE ]
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

[eastbay]

[ QUOTE ]
[ QUOTE ]
I'm taking five of his top weightings in a successful fund he runs and putting a sum of money just into those five, and removing the 150-200 other holdings in the fund

[/ QUOTE ]
Have you done any research on whether funds with a strong performance have their five largest position outperform in the future? It doesn't seem like it would be too tough to see if the data matches the theory.

[/ QUOTE ]

I am not investing in "funds" in general, so... no.

eastbay

[NeedATimeMachine]

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?

[DcifrThs]

[ QUOTE ]
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?

[/ QUOTE ]

well, now you realize he'd have to find the fund's weightings. obviously the top 5 now haven't always been the top 5...

but you are correct that a backtest of this strategy would prove as useful info.

Barron