Sleepy Winners Can Be Expensive

Everyone likes winners in their portfolio. And, holding on to them is generally thought to reflect good management. Allowing winners to remain in the portfolio well past their peak, however, can have a dampening effect on performance.

Cabot is working with a multi-billion dollar Large-Cap, Growth Fund that has beaten its benchmark on average by 60 basis points, for the past 3 years. The fund’s strategy is fundamentally driven with some quantitative support; turnover is 1.4 times per year for an average holding period of 8 months. Unknowingly, this successful manager has been giving back virtually all the alpha generated from strong buys through ineffective selling. Specifically, this manager tends to hold on to low-volatile winners well beyond their peak, selling these positions only after they begin to drop or experience negative momentum.

Now implementing a Cabot behavioral shift, this manager is being prompted daily to consider selling any winner experiencing low volatility whose holding period is greater than 12 months. By consistently acting on the daily recommendations supporting this shift, the manager can add approximately 290 bps in return and 346 bps in alpha annually. The benefits from this shift are highly predictive based on excellent statistical findings from the "Out-of-Sample Testing" (P-Value <0.5%)