Avoid­ing the Crowd is Good Bet for Beat­ing the Stock Mar­ket

Ac­cord­ing to a study, shares ‘ne­glected’ by fund man­agers gen­er­ally out­per­form

The Economic Times - - Money -

New York: US fund man­agers can en­joy out­size re­turns by fo­cus­ing on “ne­glected” stocks, ac­cord­ing to a study pub­lished in the lat­est edi­tion of The Jour­nal of Port­fo­lio Man­age­ment.

A port­fo­lio that’s long the least crowded and short the most crowded US shares earned an an­nu­al­ized re­turn of just un­der 19 per­cent be­tween 1981 and 2012, the study by aca­demics in­clud­ing the Uni­ver­sity of Wind­sor’s Li­gang Zhong showed. That com­pares with an an­nu­al­ized re­turn of about 10 per­cent for the Stan­dard & Poor’s 500 In­dex over the same pe­riod. The study uses a mea­sure of crowd­ing that com­pares the per­cent­age of each stock held by ac­tively man­aged mu­tual funds to trad­ing vol­ume. A high per­cent­age of ac­tive fund hold­ings in a low-turnover stock would re­sult in a high de­gree of crowd­ing un­der this method.

“Sur­pris­ingly, the ab­nor­mal re­turns can mostly be at­trib­uted to the least crowded stocks, which have char­ac­ter­is­tics re­sem­bling stocks ne­glected by mu­tual funds,” ac­cord­ing to the aca­demics.

The most crowded stocks tend to be the smaller-cap value shares which are heav­ily in­vested in by ac­tive funds, while the least crowded are larger-cap growth stocks with lower in­vest­ment from mu­tual funds. Th­ese least crowded shares are cov­ered by fewer an­a­lysts and owned by fewer ac­tive fund man­agers, but they have slightly higher turnover, the study showed.

“The im­pli­ca­tion is that there is lim­ited in­for­ma­tion about th­ese stocks and mu­tual funds are not pay­ing much at­ten­tion to them,” the authors wrote. Ac­tive fund man­agers have been strug­gling to hang on to as­sets as in­vestors aban­don them for in­dex-track­ing pas­sive funds. In the first half of 2017, flows out of ac­tive and into pas­sive funds reached nearly $500 bil­lion.

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