The Top U.S. Stock Pickers’ Industrials Performance

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The Top U.S. Stock Pickers’ Industrials Performance

The Top U.S. Stock Pickers’ Industrials Performance by AlphaBetaWorks Insights

And Their Consensus Industrials Ideas in 2016

The challenges of identifying good investors and distilling their skill obscure the top stock pickers’ consistently strong performance. For instance, contrary to popular wisdom 2015 was a good year for stock picking. These results also generally apply to large market sub-segments such as the Industrials sector. In this piece we use a robust risk model to identify the best U.S. stock pickers, distill their skills, and monitor their Industrials performance. We then track their consensus Industrials portfolio and reveal its top positions.

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Identifying the Top U.S. Stock Pickers

Nominal returns and related simplistic metrics of investment skill are dominated by systematic factors and hence revert. Therefore, we must eliminate these systematic effects to get an accurate picture. The AlphaBetaWorks Performance Analytics Platform calculates each portfolio’s return from security selection, or AlphaReturn. It is the residual performance net of factor effects and the performance a portfolio would have generated if all factor returns had been flat.

This study covers portfolios of all institutions that have filed forms 13F. Of these, approximately 5,000 filers had holdings histories suitable for skill evaluation. The AlphaBetaWorks Expert Aggregate (ABW Expert Aggregate) consists of the top five percent with the most consistently positive 36-month AlphaReturns. This expert panel typically includes 100-150 firms. Manager fame and firm size are poor proxies for skill, so the panel is an eclectic collection light on celebrities but heavy on skill.

Industrials Performance of the Top U.S. Stock Pickers’

Since security selection skill persists, managers with above-average AlphaReturns in the past are likely to maintain them in the future. This applies both to aggregate portfolios and to large portfolio subsets, such as sector holdings. To illustrate, we consider the top stock pickers’ Industrials performance.

A hedged portfolio that combines the top U.S. stock pickers’ net consensus Industrials longs (relative Industrials overweights), lagged 2 months to account for filing delay (the ABW Industrials Expert Aggregate), delivers consistent positive returns:

Cumulative Hedged Portfolio Return: Top U.S. Stock Pickers’ Net Consensus Industrials Longs

For illustration, we include the performance of the Vanguard Industrials ETF (VIS) (Benchmark above).

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
ABW Industrials Expert Aggregate 4.13 -2.25 25.24 14.37 7.67 9.47 3.93 6.11 2.06 12.94 2.48 5.84
Vanguard Industrials ETF (VIS) 4.88 15.35 14.14 -39.37 23.15 27.74 -2.48 17.71 42.08 9.00 -3.73 -2.82

The top stock pickers’ consistently positive Industrials AlphaReturns yield consistently positive returns, low volatility, and low drawdowns for the ABW Industrials Expert Aggregate:

ABW Industrials Expert Aggregate Vanguard Industrials ETF (VIS)
Annualized Return 8.56 7.75
Annualized Standard Deviation 7.38 19.24
Annualized Sharpe Ratio (Rf=0%) 1.16 0.40

 

ABW Industrials Expert Aggregate Vanguard Industrials ETF (VIS)
Semi Deviation 1.50 4.20
Gain Deviation 1.50 3.35
Loss Deviation 1.42 4.46
Downside Deviation (MAR=10%) 1.57 4.22
Downside Deviation (Rf=0%) 1.17 3.84
Downside Deviation (0%) 1.17 3.84
Maximum Drawdown 6.95 57.33
Historical VaR (95%) -2.52 -8.66
Historical ES (95%) -4.09 -13.08

Unfortunately, some highly skilled managers with strong Industrials books have fallen far short of the above results. Poor risk systems and losses from overlooked factor exposures often conceal stock-picking skill. The consistent absolute returns above are due in part to robust hedging that mitigates systematic noise.

Top U.S. Stock Pickers’ Consensus Industrials Positions

The top stock pickers are rarely the hottest funds and their consensus longs are rarely the hottest stocks. Below are the top 10 holdings of the ABW Industrials Expert Aggregate at year-end 2015:

Symbol Name Exposure (%)
MMM 3M Company 17.37
GE General Electric Company 5.47
ROP Roper Technologies, Inc. 3.64
UNP Union Pacific Corporation 3.61
DHR Danaher Corporation 3.26
UTX United Technologies Corporation 2.84
AGX Argan, Inc. 2.77
LMT Lockheed Martin Corporation 2.56
EMR Emerson Electric Co. 2.47
LUV Southwest Airlines Co. 2.37

It is worth noting that the above positions represent a consensus among stock-pickers who have proven their skill. This is not to be confused with crowding, which we have written about at length. Hedge fund crowding is a consensus among (often impatient and performance-sensitive) hedge funds, irrespective of their skill.

Top Stock Pickers’ Exposure to 3M (MMM)

The largest position within the ABW Industrials Expert Aggregate is 3M (MMM). The top panel on the following chart shows MMM’s cumulative nominal returns in black and cumulative residual returns (AlphaReturns) in blue. Residual return or AlphaReturn is the performance net of the systematic factors defined by the AlphaBetaWorks Statistical Equity Risk Model – the performance MMM would have generated if factor returns had been flat. The bottom panel shows exposure to MMM within the Aggregate:

Top U.S. Stock Pickers

Cumulative AlphaReturns of MMM and ABW Industrials Expert Aggregate’s MMM Exposure

Top Stock Pickers’ Exposure to General Electric (GE)

The second largest position within the ABW Industrials Expert Aggregate is General Electric (GE). The Expert Aggregate was mostly underweight (short) GE between 2008 and 2014 – a challenging period for GE. GE became experts’ consensus long in 2014 – about a year ahead of the 2015 turnaround in residual performance:

Top U.S. Stock Pickers

Cumulative AlphaReturns of GE and ABW Industrials Expert Aggregate’s GE Exposure

Top Stock Pickers’ Exposure to Roper Technologies (ROP)

The third largest position within the ABW Industrials Expert Aggregate is Roper Technologies (ROP). The Aggregate has had varied but mostly positive exposure to ROP over the past 10 years. Current exposure is at historic heights:

Top U.S. Stock Pickers

Cumulative AlphaReturns of ROP and ABW Industrials Expert Aggregate’s ROP Exposure

Conclusions

  • Robust analytics built on predictive risk models identify the top stock pickers in the sea of mediocrity.
  • When hedged, top stock pickers’ net consensus Industrials longs (relative overweights) tend to generate positive future absolute returns and net consensus industrials shorts (relative underweights) tend to generate negative future absolute returns.
  • The top stock pickers are often unglamorous firms and their consensus Industrials longs are often unglamorous stocks – both tend to outperform.

The information herein is not represented or warranted to be accurate, correct, complete or timely.
Past performance is no guarantee of future results.
Copyright © 2012-2016, AlphaBetaWorks, a division of Alpha Beta Analytics, LLC. All rights reserved.
Content may not be republished without express written consent.
U.S. Patents Pending.

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AlphaBetaWorks provides risk management, skill evaluation, and predictive performance analytics. Developed by finance and technology veterans, our proprietary platform combines the latest advances in financial risk modeling, data processing, and statistical analysis. Our Risk Analytics are more robust than alternatives and our Skill Analytics are predictive. Risk Analytics AlphaBetaWorks pinpoints risks missed by other offerings and delivers unique insights. AlphaBetaWorks Risk Analytics were developed by investment professionals seeking usability and a deeper understanding of portfolio exposures. Predictive Performance Analytics Starting with robust, proprietary risk models, AlphaBetaWorks adds layers of attribution and statistical analysis. Our Skill Analytics describe a multitude of specific skills that are strongly predictive of future returns for any fund, manager, or analyst with a sufficient sample of investment history. The AlphaBetaWorks Advantage Our Risk and Performance Analytics provide unique insights: For portfolio managers, we identify overlooked exposures, hidden risk clusters, and crowded bets. Managers can focus on risks in areas where they have proven ability to generate excess returns and avoid undesired risks in areas where they do not. For fund allocators, we identify the skills, crowding, and hidden portfolio bets of individual funds and portfolios of funds. Allocators can identify differentiated and skilled managers that are deploying capital in areas of proven expertise – and more importantly, those that are not. Background As finance professionals, we spent the last decade focused on fundamental investment analysis and the study of great (and seemingly great) investment managers. We asked of ourselves: Where are the unintended risks in a portfolio? What is the chance that a manager possesses true investment skill and was not just lucky? Does investment skill persist and is past skill a predictor of future results? There was no product, service, or technology that rigorously and consistently answered these questions. With decades of fundamental investment analysis, risk management, mathematics, and technology expertise, AlphaBetaWorks professionals have developed risk and skill analytics to address these and related questions.
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