Incentives Matter

Josh Brown noticed that Steven Russolillo is winding down the WSJ‘s stock-picking column. Why? Simply put, hunting for cheap stocks has become a dying art.

Josh sees this as part of a long-term decline for active investing, and he highlights AllianceBernstein’s new incentive-based pay structure for active managers.

Later on, Josh talks about my venture into exchange-traded funds:

I gave some money to my old friend Eddy Elfenbein when his Crossing Wall Street ETF launched last fall. He did well and I will probably give him some more.

He’s got the first actively-managed ETF with a variable management fee built into it (his product was launched through Noah Hamman’s AdvisorShares fund family). He’s doing between 20 and 30 of his favorite stocks, which will either be very good or very bad in different market environments. But overall, he’s not snuggling up to the Russell 3000 or the S&P 500. I have no way of knowing whether or not what he’s trying to do will work, I only know that it won’t look exactly like an index fund I can buy for approximately zero dollars.

Here’s Voss and Howard again on concentration:

Studies show that buy-side analysts are quite good at security selection: Take, for example, the high levels of accretive alpha of their highest conviction/largest positions, as measured by ex-ante relative portfolio weights. Moving down the relative weights, performance worsens, with holdings beyond the top 20 generating negative alpha. In other words, most portfolios are overdiversified and research shows that hurts performance.

What’s interesting is that, because Eddy doesn’t focus on the benchmark in terms of how he talks about his approach, I have never even once looked at CWS’s performance against it, only absolutely. There’s a benefit to this sort of reframing that I should probably think more deeply about.

There should be more attempts at innovation like what we’re seeing from Eddy and AB. Something will eventually click.

Posted by on May 22nd, 2017 at 12:01 pm


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