If everyone is riding the same wave, why do some surfers go faster than others? Differences in equipment, physical fitness, and skill can give the boost surfers need to gain speed. Small advantages can add up quickly. Similarly, portfolio managers in the equity markets all face a level-playing field. In the U.S. alone, there are almost 7,000 publically traded companies. Intuitively, equity managers who can consistently identify a handful of above average stocks and go long while shorting a few mediocre stocks should be able to consistently beat the market. So why do so many funds underperform their benchmarks? We feel it is important to keep the big picture in mind, or you might miss catching the wave altogether. Here are three high-level areas for potential performance advantages:
- Use of structure or systemized processes – a short-term hot streak can end quickly without processes to identify the right securities and properly timing entry and exit points for those positions.
- Evaluate quality accurately – managers can be blindsided if they are not consistently evaluating portfolio holdings from a purely objective eye; long positions can go south or short positions can jump unexpectedly.
- Keep Fees Low – excessive trading commissions and wide bid/ask pricing spreads can chisel away at portfolios and quickly cause good managers to underperform.
Portfolio managers all face the same economic and market conditions. Pawleys Capital Management focuses on building portfolios that will perform well in a myriad of environments. Our processes are systematic, we work hard to properly assess the quality of holdings, and we keep costs low. Surf’s up!
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