(866)-482-2177

sales@alphatheory.com

REQUEST A DEMO

SYSTEM REQUIREMENTS


Please note the following System Requirements. Further, please limit the number of open applications (particularly price streaming applications) while logged in to Alpha Theory™.


Recommended System Specifications
Processor: Dual Core or Quad-Core 2.4GHz or faster
RAM: 4GB+
Browser: Google Chrome 30+
Screen Resolution: 1280 x 1024 or greater
Internet Access: Business Class High-Speed


Minimum System Requirements
Processor: Intel Pentium-M 2.0Ghz or equivalent
RAM: 2GB+
Browser: Google Chrome, Mozilla Firefox, Internet Explorer 9+ (without Compatibility View), Safari
Screen Resolution: 1024 x 768 or greater
Internet Access: High-Speed

Alpha Theory Blog - News and Insights

June 01, 2017

The Value of Price Targets

Abstract

We analyze the difference in ROIC (Return on Invested Capital) for the portion of client portfolios with price targets and the portion of client portfolios without price targets. In examining exposures, we find a long bias in the portion of the portfolio with research versus the portion of the portfolio without research making the Total measurements less meaningful. To neutralize this distortion, we look at differences on a long and short basis. We find that the portfolios with price targets outperform by 16% on an annualized ROIC basis (average of long and short improvement).

We also look at optimal position sizing suggested by the Alpha Theory algorithm and find that optimizing position sizes that have price targets adds an additional 5% for long positions.

Screen Shot 2017-06-01 at 2.32.50 PM

Table 1

Data

Alpha Theory tracks investment results for clients on a daily basis. We’re able to segment the daily returns for portfolios into two categories, securities with price targets and securities with no price targets. We’re then able to calculate an average daily return across our client base, segmenting into these two categories. All of our calculations are done on an ROIC basis for comparability purposes. Removing the exposure effect would result in returns of a portfolio that is 100% allocated to either category. For comparison, we also calculate returns based on optimal position sizing recommendations as well as returns on the ACWI, an all-world index.

Research

Figure 1 shows the cumulative returns over the time for the period of the analysis, where we break out client portfolios by the portion with and without price targets. We also look at how the optimal portfolio would have performed, which is a portfolio composed of securities with optimal position sizing output from Alpha Theory. Alpha Theory uses price target inputs to recommend position sizing based on risk adjusted returns calculated from those price targets. Alpha Theory does not recommend position sizing on securities without research, so the comparison would be best made between optimal returns and the portion of the portfolio with price targets. We find that the portion of the portfolio with no price targets significantly underperforms the price target portfolio, by 11.5% on an annualized basis.  What we also see is that the price target portfolio, if sized optimally (where not already done so), would have increased performance even further, by 3.3%. Decomposing the exposures on the price target and non-price target portfolio reveals that the average net exposure for the price target portfolio is 40% and the average net exposure on the non-price target portfolio is -12%. This is an interesting divergence, as it tells us that managers are more likely to initiate a short position without research than a long position without research. With the non-price target portion running such a low net exposure, we would expect average returns to be roughly zero, as longs and shorts balance each other over a large sample. A clearer picture would be one where we break out the long and short portions.

Screen Shot 2017-06-01 at 2.39.03 PM

Figure 1

Figure 2 shows the same data for the long portion of the portfolio. We find that the long price target portfolio outperforms the long non-price target portfolio by 3.4% on an annualized basis. Sizing optimally (where not already done so) adds an additional 1.0% to the annualized return.

Screen Shot 2017-06-01 at 2.39.38 PM

Figure 2

We then look at the same data for the short portfolio in Figure 3. We find that the price target portfolio outperforms by 0.9%, on an annualized basis. Sizing optimally (where not already done so) would have added an additional 3.2%.

Screen Shot 2017-06-01 at 2.41.13 PM

Figure 3

Conclusion

Our assumption for why securities with price targets outperform those without is that price targets inform investors of value, make explicit the logic around their decisions, allow for optimal position sizing to be calculated and have a higher level of research rigor.

Investing in assets without first calculating price targets is deleterious to returns. This result is intuitive to most managers but hopefully this gives empirical evidence that will prevent future positions going into the portfolio without the critical step of defining risk-reward.

May 15, 2017

Changing The Course Of Active Management — The Concentration Manifesto

Is this the end of active portfolio management? You would think so if you listen to pundits. But I see it differently. I believe we have reached a critical juncture that will ultimately redefine the space for the better — where the winners will search for ways to constantly refine their process to maximize their edge.

At Alpha Theory, we are also searching for ways for our clients to maximize edge. To that end, about a year ago, while doing some research on the impact of “crowdedness” in portfolio sizing, my team and I discovered that crowded names consistently outperformed less crowded names. That made us wonder; in general, do holdings with bigger position sizes outperform those with a smaller position size? After digging through the numbers from a cross section of 60 funds totaling over $70 billion in assets under management, we found empirical evidence that they did.

We knew we were on to something. We then isolated our clients’ highest expected return positions to see if they were the best returns. They were. With all of this demonstrated skill and ability, the question remained: why do active managers underperform? The simple answer: low conviction positions negated most of the performance they generated with the high conviction names.

The Concentration Manifesto is my attempt to get a critical dialogue started between managers and allocators to ultimately improve the active management process. As you will see, the solution is simple, but not easy. It will require that both sides cast aside outdated thinking and embrace the notion that concentration is in their best interest. But by encouraging these important discussions, I believe we will be solidifying the long term survival of the active management industry.

I hope you find the analysis insightful and valuable and I look forward to being part of the conversation.

 

DOWNLOAD FULL VERSION