The top performing Diamond Rating 5 (DR5) funds do so because they are strategy consistent and strategy focused. The top stocks held by these funds are of interest to investors since, on average, they generate the highest returns within the portfolio. In order to identify these top holdings, AlphaIQ is calculated for each US stock held by US equity fund managers and each international stock (as determined by issuing country) held by international equity fund managers. AlphaIQ captures the extent to which a stock is a top holding within the US equity universe or the international equity universe.

Calculating a Stock's AlphaIQ

Each month, the raw holdings data for the 5,000 stocks held by at least 5 active equity funds is scaled in order to eliminate strategy, fund, and stock size effects. The results represent a stock’s relative importance within the equity universe. These are aggregated across funds to produce a stock’s Strategy and Diamond Rating Profiles. Individual stock AlphaIQs are calculated using these profiles and scaled within each strategy to range between 0 and 100, with 100 being assigned to those stocks most held by top rated managers. Stock Diamond Rating 5 is assigned to those stocks with the highest AIQ’s, DR4 to the next highest range of AIQs, and so forth. Stocks are roughly normally distributed across DRs. Subsequent stock performance improves with DR.

How Old is Too Old?

Many question the usefulness of stale holdings data for constructing stock portfolios. The holdings information AthenaInvest uses is on average three to four months old. Surprisingly, we and others have determined that the “shelf life” of top fund holdings data is at least one year. That is, top fund holdings data as old as one year allows for the construction of stock portfolios that subsequently generate positive alphas, albeit diminishing with holding age.

Other researchers have determined that the performance loss due to using three month old holdings is roughly equal to the expense ratio for the average fund. Put another way, the value of knowing the current versus the most recently reported holdings (average of three months old) is about 160bp annually, the average annual expense ratio for the typical fund.

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