Category Archives: Skill

Greenlight Capital’s Energy Equity Security Selection

iShares Core High Dividend ETF (HDV) Alpha and Beta

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:

Chart of the history of U.S. Market Beta for iShares Core High Dividend ETF (HDV)

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):

Chart of the risk-adjusted returns from security selection of iShares Core High Dividend ETF (HDV)

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:

Chart of the security selection return of iShares Core High Dividend ETF (HDV) compared to the peer group of all U.S. mutual funds with medium turnover

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:

Chart of the Security Selection Return of Pershing Square's Long Portfolio

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):

Chart of the Security Selection Return of Pershing Square's Long Finance Sector Portfolio

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:

The Chart of Position Sizing Return for Long Positions of Greenlight Capital (13F Filings)

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):

Chart of the Security Selection Return of Artisan International Fund (ARTIX)

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:

Chart of the Security Selection Return of Artisan International Value Fund (ARTKX)

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:

The Position Sizing Return of Artisan International Fund (ARTIX)

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:

Chart of the Security Selection (Stock Picking) Performance of the Energy Sector Portfolio of Paulson & Co, Obtained From 13F Filings

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:

The Security Selection Return of the 13F Portfolio of Fisher Asset Management, LLC

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):

The Chart of Cumulative Security Selection Return for Oakmark Fund (OARMX)

Oakmark Fund (OARMX) Security Selection Return

Over the same period, Oakmark Fund lost ~12% from technology sector security selection:

The Chart of Cumulative Security Selection Returns for Technology Sector Security Selection Return for the Technology Sector Portfolio of Oakmark Fund (OARMX)

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%.