As we discussed in an earlier article, excellent investors are not equally proficient in all areas. While Greenlight’s overall stock picking performance is stellar, it does not extend to all sectors. Its picks are excellent in technology and subpar in healthcare, for instance. Results are mixed in energy.
The following is a chart of the estimated security selection (stock picking) return due to the energy positions of Greenlight Capital. This is Greenlight’s αReturn – the estimated annual percentage return a fund would have generated in a flat market. The chart covers long equity (13F) portfolio:
Greenlight Capital Long Equity Security Selection Return – Energy Contribution
Over the period, Greenlight’s energy positions underperformed a passive portfolio with similar systematic risk by approximately 1%.
Talented investors’ skills are specific. Greenlight’s followers should be careful before investing in an energy stock based solely on Greenlight’s involvement.
iShares Core High Dividend ETF (HDV) is a low-risk fund that has consistently delivered positive risk-adjusted return.
iShares Core High Dividend ETF (HDV) – Historical Beta
U.S. Market exposure (beta) of the fund has varied in the narrow window between 0.52 and 0.60:
iShares Core High Dividend ETF (HDV) U.S. Market Beta History
iShares Core High Dividend ETF (HDV) – Historical Alpha
The fund has consistently generated positive risk-adjusted return from security selection (αReturn):
iShares Core High Dividend ETF (HDV) Security Selection Return History
This αReturn exceeds the results of 95% of U.S. mutual funds with medium and lower portfolio turnover rates:
iShares Core High Dividend ETF (HDV) Security Selection Return Vs Peers
Pershing Square’s Finance Sector Security Selection Performance
Pershing square has a phenomenal track record of stock picking. Over the past 10 years, it has generated approximately 200% risk-adjusted return from security selection in its long (13F) portfolio. If market were flat for the past 10 years, the portfolio would have gained approximately 200%. We call this risk-adjusted return αReturn:
Pershing Square Security Selection Return – Long Positions
The performance of the firm’s finance sector stock picks is almost as impressive, just slightly less strong than the overall portfolio and less consistent. Over the past 10 years Pershing Square’s long finance sector portfolio generated approximately 150% risk-adjusted return from stock picking (αReturn):
Pershing Square Finance Sector Portfolio Security Selection Return – Long Positions
This is encouraging for the investors in Fannie Mae (FNMA) and Freddie Mac (FMCC). Bill Ackman has invested in the companies and sees them as the most interesting opportunity since General Growth Properties (GGP) in 2008.
Greenlight’s Long Equity Position Sizing
Greenlight’s top positions generally aren’t its best ones. It is common to assume that the top positions of skilled investors are their best ideas, but this is not always the case. If Greenlight sized all positions equally for the past 10 years, the risk adjusted return of long portfolio would have been approximately 20% higher.
We can’t know for sure whether Greenlight Capital can’t identify their best stock picks, or can’t scale them. What we do know is that the risk-adjusted return of their average position is higher than the risk-adjusted return of their top position. AlphaBetaWorks defines this return – the difference in stock picking (αReturn) between the actual portfolio and equal-size portfolio – as sReturn. For Greenlight, it is negative:
Greenlight Capital Position Sizing Return – Long Positions
When a successful manager’s fund grows, they may have trouble scaling their best picks. Their largest positions become the names they can, rather than prefer to, buy the most of.
Artisan International Fund (ARTIX) and Artisan International Value Fund (ARTKX) – Security Selection
Both Artisan International Fund (ARTIX) and Artisan International Value Fund (ARTKX) show excellent security selection (stock picking) performance over the past 10 years.
If all markets were flat for the past 10 years, ARTIX would have generated approximately 0% cumulative return from stock picking. This is not bad: The average fund would have lost money, even with the massive survivor bias of the peer group (funds that have been around for 10 years):
Artisan International Fund (ARTIX) Security Selection Return
The results of ARTKX are spectacular. It would have made over 35% if markets were flat – one of the best track records among domestic and international funds:
Artisan International Value Fund (ARTKX) Security Selection Return
A word of caution: ARTIX shows signs of over-capitalization and position scalability issues. It lost approximately 30% over the past 10 years due to position sizing. Its largest positions were (consistently) its worst stock picks:
Artisan International Fund (ARTIX) Position Sizing Return
In summary: Stock picking skills of the flagship international funds appear strong, but their scalability is a concern.
Paulson & Co Energy Sector Security Selection Skill
One should be careful when handling Paulson’s energy picks.
A portfolio of Paulson’s long (13F) energy positions has lost ~50% on a risk-adjusted basis. ETFs with the same market and energy sector exposures as the energy portfolio have outperformed it. The historical security selection (stock picking) performance of Paulson’s 13F positions is the blue αReturn on the following chart:
Paulson & Co Energy Sector Security Selection Return – 13F Positions
The energy sector stock picking has stabilized of late, but there is probably a stronger case for going short these positions, than long.
Fisher Asset Management Security Selection Return — 13F Portfolio
The following is a chart of Fisher Asset Management, LLC’s estimated security selection (stock picking) return for all long positions over the past 10 years:
Fisher Asset Management Security Selection Return – 13F Portfolio
The analysis evaluated 10 years of 13F fling history for the firm. It estimated the returns the portfolio would have generated if markets were flat – stock picking performance independent of the market.
Oakmark Fund (OARMX) Technology Sector Skill
In general, even fund managers that generate persistently positive active returns are rarely skilled across the board. They have stronger skills or employ stronger analysts in some sectors than in others.
The Oakmark Fund (OARMX) is no different. Over the past 10 years, it generated ~15% from security selection (stock picking):
Oakmark Fund (OARMX) Security Selection Return
Over the same period, Oakmark Fund lost ~12% from technology sector security selection:
Oakmark Fund (OARMX) Technology Sector Security Selection Return
Technology investing is notoriously hard for value investors and mutual funds in general. Even with survivor bias, technology portfolios of medium turnover U.S. mutual funds with 10 years of history have under-performed by ~20%.
Value Partners High Dividend Stocks Fund has excellent long-term security selection (stock picking) performance. Results are ahead of 2/3 of U.S. mutual funds. However, inconsistency of security selection returns is a concern.
The fund generated approximately 3% annual gross return from security selection:
Value Partners High Dividend Stocks Fund αReturn (AlphaReturn)
This is the residual return, or αReturn. It is the return in excess of the systematic performance due to the fund’s factor (market) bets. It is also the return a fund would have generated in a flat market.
This compares favorably to U.S. mutual funds:
Value Partners High Dividend Stocks Fund and Group αReturn (AlphaReturn) Distribution
One major issue is inconsistency. The other is the expense ratio, eating up approximately 2/3 of the historical αReturn.