The result was rather astonishing: a random sale of other holdings consistently outperformed the one selected for sale by the manager — and by a fairly wide amount. The counterfactual portfolio with the random sells outperformed the portfolio with managed sells by 50 to 100 basis points over the course of the following year. In other words, the random selection did a better job of keeping winners and tossing losers than the fund manager did.
Just as fascinating: when the researchers created a similar counterfactual portfolio, only randomizing the buys, it underperformed the active strategy. Hence, when compared with randomized buys or sells of existing portfolio holdings, managers demonstrated genuine skills — but only when making their buys; they showed little or no skill when making their sells.
This study has profound ramifications for active managers, but also shows a path toward improvement. If this group hopes to regain market share and fee-generating assets versus the uninterrupted trend toward passive indexing, they must become as skilled and disciplined at selling as they are at buying. Given the results of this study, they have a lot of work to do.
This column was provided by Bloomberg News.