Category: Articles

Articles

When Buying Low And Selling High Destroy Alpha

Post author By Kyra Spradlin
Post date April 22, 2024

BEHAVIORS

ARTICLE

Article Forthcoming in Journal of Investing | May 2024

Written by Michael A. Ervolini and Andrew R. Tuttle

3 min read

When Buying Low and Selling High Destroy Alpha: Visualizing The Interplay Amongst Judgment, Process, and Prospect Theory

Article Abstract

Evidence of the disposition effect and its negative impacts on equity funds is well established. Many managers continue to sell winners too quickly and hold on to losers too long. Efforts to eliminate these and other behavioral tendencies appear to be limited in their impact. Weak feedback regarding which decisions are helping generate excess returns and which aren’t is a major stumbling block that inhibits such improvement efforts. So too is the resistance to change frequently present when change is unconsciously perceived as more risky than the status quo. This paper argues that the use of newer analytics, in particular the vivid visualizations of manager decisions with individual holdings, can greatly increase the odds that a manager will develop greater self-awareness and actually improve.

Three Key Takeaways:

Confirmation of behavioral tendencies such as the disposition effect have existed for decades. Yet, there is scant evidence that knowledge of these tendencies has impacted equity manager decisions or fund results.

Looming largest amongst the reasons many managers have trouble eliminating behavioral tendencies and improving generally are: the lack of rigorous feedback about which decisions add alpha and which destroy it, and succumbing to emotional needs that are in conflict with learning.

Visualizations reflecting each action taken by a manager on individual holdings, in conjunction with rigorous and granular fund-level analytics, can enable managers to overcome unproductive behavioral tendencies.

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MICHAEL A. ERVOLINI, AUTHOR

The ideas expressed on this website are developed and/or curated by Michael Ervolini. Mike has spent his entire 35+ year career leading efforts to improve and strengthen active management.

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JUDGEMENT

WHEN BUYING LOW AND SELLING HIGH DESTROY ALPHA

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ACTIVE MANAGEMENT – TAKE DOWN THE WHITE FLAG

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BEHAVIORS

WEAK FEEDBACK AND DENIAL ARE KILLING ACTIVE MANAGEMENT

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Tags active management, judgment

Articles

Active Management – Take Down The White Flag

Post author By Kyra Spradlin
Post date February 26, 2024

ARTICLE

Behavioral Published in Pensions & Investment | February 2024

Written by Michael A. Ervolini

2 min read

Active Management – Take Down The White Flag

Article Abstract

This article discusses several of the challenges facing active equity management including: the shift from active to passive equities, the emergence of active ETFs, and the downward pressure on active fees. It also offers hope from the potential to improve equity results with the help of stronger feedback. The new analytics described enable asset owners and allocators to have greater conviction in their decisions, while also allowing managers to become more self-aware and improve. For the full text click on the link below.

Three Key Takeaways:

It’s time for equity managers to fight back by generating stronger results more consistently.

Newer analytics now enable managers to become more self-aware and to improve deliberately. These newer analytics quantify skills and analytically describe investment processes, allowing managers to replace guessing with rigorous feedback.

Managers using these analytics are already benefiting – by delivering their best results and maintaining assets and winning new allocations.

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MICHAEL A. ERVOLINI, AUTHOR

The ideas expressed on this website are developed and/or curated by Michael Ervolini. Mike has spent his entire 35+ year career leading efforts to improve and strengthen active management.

RESOURCES

MOST POPULAR ARTICLES

JUDGMENT

WHEN BUYING LOW AND SELLING HIGH DESTROY ALPHA

LEARN MORE

PROCESS

ACTIVE MANAGEMENT – TAKE DOWN THE WHITE FLAG

LEARN MORE

BEHAVIORS

WEAK FEEDBACK AND DENIAL ARE KILLING ACTIVE MANAGEMENT

LEARN MORE

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Tags active management, analytics, equity management, feedback, process

Articles

Weak Feedback And Denial Are Killing Active Management

Post author By Kyra Spradlin
Post date February 16, 2024

ARTICLE

The Journal of Portfolio Management | February 2024

Written by Michael A. Ervolini

2 min read

Weak Feedback And Denial Are Killing Active Management: A Slow Death Perhaps But One That Is Avoidable

Article Abstract

It’s been over a decade since the introduction of analytics that effectively quantify manager skill. Yet there is little evidence that these enhanced metrics are being used by active equity managers, based on the general results of funds versus their benchmarks. Initially it was believed that most managers would eagerly adopt these enhanced analytics and learn to be more self-aware and improve. This belief proved to be overly optimistic. Hundreds of interviews with equity professionals indicates a second roadblock to the much needed turnaround across active management – this one being denial. And while resistance to change is perfectly understandable it is undermining the active management industry. The paper argues that both weak feedback and individual denial are co-contributors to the industry’s lackluster results.

Three Key Takeaways:

Weak feedback long has been a significant impediment to equity managers learning and improving. Newer analytics introduced over the past decade have vastly improved the quality of information now available to managers.

Nevertheless, active equities as a whole continue to struggle. It’s now clear that in addition to the once analytic shortcomings holding back manager success there is also the issue of widespread denial.

One new analytic that can help managers improve is the analytic

assessment of their information advantage. This analytic provides a clear quantification of the alpha generating capacity of the fund’s average new buy.

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MICHAEL A. ERVOLINI, AUTHOR

The ideas expressed on this website are developed and/or curated by Michael Ervolini. Mike has spent his entire 35+ year career leading efforts to improve and strengthen active management.

RESOURCES

MOST POPULAR ARTICLES

JUDGMENT

WHEN BUYING LOW AND SELLING HIGH DESTROY ALPHA

LEARN MORE

PROCESS

ACTIVE MANAGEMENT – TAKE DOWN THE WHITE FLAG

LEARN MORE

BEHAVIORS

WEAK FEEDBACK AND DENIAL ARE KILLING ACTIVE MANAGEMENT

LEARN MORE

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Tags active management, feedback, process

Articles

When Unconscious Desires Motivate Fund Selection

Post author By Kyra Spradlin
Post date May 10, 2023

ARTICLE

Journal of Investing | May 2023

Written by Michael A. Ervolini and Andrew R. Tuttle

2 min read

When Unconscious Desires Motivate Fund Selection: Active Share and Position Count May Do More To Relieve Angst Than Identify Skill

Article Abstract

Identifying equity funds likely to outperform remains a daunting task for capital allocators. Traditional portfolio analyses provide useful insights into how a fund is being managed while offering little clarity on the potential for ongoing success. Active share and position count were introduced as metrics that identify funds that will generate excess returns via skilled management. This paper argues that these metrics provide no information regarding future fund performance or manager skill. It is further proposed that active share and position count do more to relieve unconscious anxiety provoked during the allocation process rather than enhance rigorous judgment.

Three Key Takeaways:

Allocators remain committed to active equities but struggle in identifying skilled managers.

Recent emphasis on high conviction does a poor job at identifying skilled managers.

Metrics such as active share and position count do more to relieve angst than to support allocation decisions.

SEE FULL ARTICLE

MICHAEL A. ERVOLINI, AUTHOR

The ideas expressed on this website are developed and/or curated by Michael Ervolini. Mike has spent his entire 35+ year career leading efforts to improve and strengthen active management.

RESOURCES

MOST POPULAR ARTICLES

JUDGMENT

WHEN BUYING LOW AND SELLING HIGH DESTROY ALPHA

LEARN MORE

PROCESS

ACTIVE MANAGEMENT – TAKE DOWN THE WHITE FLAG

LEARN MORE

BEHAVIORS

WEAK FEEDBACK AND DENIAL ARE KILLING ACTIVE MANAGEMENT

LEARN MORE

Continue improving with our newest investment insights & articles.

Subscribe to receive our latest articles and news updates

By clicking “Sign up” you agree to our Terms of Service.

The multi-trillion dollar active management industry is predicated on the idea that managers have skill – yet little is known about it – Who has skill? How is it measured? This website is dedicated to finding answers to the questions surrounding skill.

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