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A recent study entitled "Does Motivation Matter When Assessing Trade Performance? An Analysis of Mutual Funds" showed that active portfolio managers are actually quite good at picking stocks … when they really care about the trade. The trouble is that they don't care most of the time. The authors of the study divided the trades active portfolio managers make into two groups: trades made based on "valuations," and trades made because of large in- and outflows into the fund ("liquidity-driven trades"). The "valuation" trades were selected when portfolio managers made a trade against fund liquidity: that is, when they bought a stock despite major fund outflows, or sold a stock despite major fund inflows. The results were impressive: From January 1980 to December 2003, buys made for valuation outperformed the market by 2.8 percent, while valuation sales outperformed by 0.7 percent. The trouble for active managers is that most of their trades are made simply to put money to work, or to compensate for outflows. And these trades tend to turn out poorly. |
