Hight: Portfolio managers should trim winning positions as expected return declines
Cameron Hight · Clare Flynn Levy and Cameron Hight - Moneyball for Managers (Capital Allocators, EP.43) · Mar 12, 2018 · at 1:10:05
Cameron Hight, CEO of Alpha Theory, discusses common portfolio management biases where investors let winning positions grow even as risk-reward skew deteriorates.
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“We find managers should be trading around positions more. They're generally not, and the positions that's easiest to ignore is the one that's working and making you money, and so what happens in that situation is the price is going up, which means the position size is going up as a percentage of your total assets under management, and so let's say a five percent position has now grown to a seven percent position, but what also happens to the expected return in that case? The expected return goes the opposite direction, all else being equal. Let's just say that our Price target was 100. The stock's gone from 50 to 70. So the expected upside has gone down. The expected downside has gone up. And clearly something's changed. Maybe the probabilities of upside or downside, but clearly you can reset those expectations, but the expected return in some ways has gone down while our position size is going up. Managers in general should be trading more because there's a big reversion to the mean factor in the market.”
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