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Challenging the stock-picking consensus

by Robert St George on Mar 03, 2014 at 09:55

There is a closer relationship, however, between dispersion and the returns generated by highly performing managers.

In essence, when dispersion is high, top quartile managers tend to deliver a greater premium over bottom quartile managers than when dispersion is low. This makes intuitive sense.

‘There is more opportunity to do well, but also more opportunity to do poorly,’ says Craig Lazzara, senior director for index investment strategy at S&P Dow Jones Indices.

Edwards adds: ‘If you are a bad or unlucky manager, you want low dispersion.’

Another point of interest from Edwards and Lazzara’s work is multi-asset portfolios. These monitor dispersion in a notional basket of stocks of all sizes and regions, of government, corporate and emerging market bonds, of hedge funds, and of commodities.

Within this portfolio, dispersions have slipped to around two thirds of their levels in the late 1990s and early 2000s.

‘The level of portfolio diversification that was easily achieved in the late 1990s is no longer available,’ warn Edwards and Lazzara.

‘One may need to incorporate additional, otherwise esoteric, investments such as frontier markets or Vix futures in order to achieve the portfolio’s former level of diversification.’

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