Funds managers typically sell winners and hold onto losers, losing nearly 100 bps of potential returns in the process, according to Inalytics research.

In a study published yesterday, the web-based Inalytics quantitative analysis tool, Trading P&L, found that in a one-year sample period, managers had sold 57 per cent of outperforming stock while retaining 43 per cent of underperforming shares. In the month preceding the sells, 54 per cent of their stock underperformed, a possible catalyst for the sells. But the stocks outperformed by 1.9 per cent in the six months following the sells, and by 3 per cent in the 12 months afterwards. The poorly-timed sells resulted in an annualised 94 bps loss, which can be the difference between a good year and a bad year, Inalytics concluded. Inalytics managing director Asia Pacific, Amanda Field, said the phenomenon could be best explained by the ‘disposition effect’: “a theory academics have coined to explain investors’ tendency to lose more money when selling, than they would by chance alone”. The research drew on a database containing 45,000 institutional trades completed by Inalytics clients, primarily based in Europe, and covered various regions and benchmarks. This information was primarily sourced from custodians and the funds managers themselves. “By dissecting the numbers…we get behind what drives that performance,” Inalytics chief executive, London-based Rick Di Mascio, said. “We look at all decisions and look at them in aggregate. People haven’t been tracking these until now. Having analysed the issues, we sit down with the CIOs and heads of portfolios to help them develop an action plan. But sometimes it’s better if we provide the information then back off.” The buy/sell timing analysis software embodies one third of the Inalytics system. Parallel analyses on stock selection and portfolio construction, which examine sources of alpha, make up the rest of the package. Elsewhere, the data proved that managers were adept buyers of stock, adding an annualised 47 bps to portfolios through well-timed buys. But such outperformance was “more than offset” by poorly-timed sells, Di Mascio said. Half of the Inalytics staff members are former funds managers. From their experience, and from working with clients, the company has reasoned that managers typically focus on buys to such an extent that analysis of selling decisions is neglected. “The amount of work going into buying and selling are completely disproportionate. Sells are usually cash-raising for buys.” The research also noted that sellers are in short supply: often pessimistic, suspicious and cynical, they are generally outnumbered by the more upbeat, forward-looking buyers. Di Mascio advises that good sellers be valued highly. “When we find one of these gems, we make sure [clients] keep them.” For a manager to be an astute buyer and seller, they would “almost have to be schizophrenic and be looking for what will go up as well as down,” Di Mascio said. Meanwhile, it is understood that Inalytics is in the process of securing a contract with an Australian super fund. Worldwide, the London-based company has 26 clients from the funds management and pension fund industry.

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