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Institutional investors are far better off buying stocks than selling them. According to Michael Ervolini, former CEO of Cabot Investment Technology, now a subsidiary of FactSet Research Systems, this was due to a lack of care during the sale process, which resulted in a loss of proceeds from the sale. is said to decrease.
If they sell wisely, these investors could gain 100 basis points annually on their portfolios in 85% of the cases Cabot studied. A survey by Cabot, which advises financial institutions, found that only 29 companies tracked their sales procedures using research and backtesting and described them as having highly disciplined sales procedures. %was.
For investors, it is more important than ever to correct lax selling practices. That’s because actively managed mutual funds and exchange-traded funds (which act as proxies for the entire investment space) are becoming less important as passive funds continue to outperform active ones. This performance has continued for his 20 years, and the performance gap is widening.
The problem is now even more serious. According to Morningstar research, in 2023, assets held by passive funds will outweigh active funds by $13.3 trillion compared to $13.2 trillion. Therefore, this return lag issue has become a major concern among active managers these days.
Ervolini, author of Managing Stock Portfolios, a book that explores this topic, says investors often hold on to stocks far past their peak, so by the time they sell, the assets are worth less than they should have been. He points out that it has also fallen significantly. FactSet said he acquired Cabot in 2021, and Mr. Ervolini most recently worked as a “talent employee” for the company.
Ervolini quotes Terrence Odean, an economist at the Haas School of Business at the University of California, Berkeley, who says that psychologically, buying is more attractive than selling. Mr. Odin told him: Managers choose to buy based on what they can bring to future performance. ”
In contrast, older stocks may be disappointing. Investors “hold on to winners for longer than necessary,” Ervolini said. You may also throw away recently purchased items before you know what their long-term consequences will be. “Selling too early or too late can result in positive costs to your portfolio that are equal to or more than the costs you would receive from a purchase,” he warns.
In Mr. Ervolini’s estimation, investors often find themselves in a pit of regret if they are unable to assess what went wrong and what went well with long-term holdings. Academic journals rarely talk about sales, he laments, but mostly about purchase considerations.
How should investors proceed with the sale? First, look at your records to see what worked, Ervolini advises. Then, he says, “slowing down and thinking” before your next sale can help you avoid acting rashly. Then, he added, try to get “timely feedback” from others.
Of course, allocators are always selling, whether they have strong active trading programs or are focused on tracking an index. It still needs to be rebalanced to synchronize with index changes.
Asset allocators tend to be passive investors, although their approaches differ. An example of a passive system is the California Public Employees’ Retirement System, the largest pension plan in the United States. Approximately 70% of CalPERS’ liquid securities are passively managed.
The Florida Board of Supervisors, on the other hand, takes the opposite approach when it comes to asset management of liquid securities. University endowments are more likely than pension funds to pursue active management.
Regardless of the type of organizational strategy, a lack of focus on sales makes it “difficult to properly understand and improve this critical skill,” Ervolini said.
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Tags: active management, alpha, Cabot Investment Technology, Calpers, FactSet, Florida Board of Trustees, Haas School of Business, stock portfolio management, Michael Ervolini, sales, Terrence Odean
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