Stock Diamond Ratings

Top active equity funds outperform because they are characterized by strategy consistency and conviction. The top stocks held by these top funds are of interest to investors since, on average, they generate the highest returns within a portfolio. In order to identify these top stocks, Athena aggregates holdings across all US and International active equity fund funds and assigns a stock Diamond Rating to each. The Diamond Rating captures the extent to which a stock is a top holding of top managers within the US equity universe or the International equity universe.

Each month, the raw holdings data for the stocks held by at least 5 active equity funds is scaled to eliminate strategy, fund, and stock size effects. These relative holdings are then aggregated across all funds. Stock Diamond Rating 5 is assigned to those stocks held in the top positions by the top managers, Diamond Rating 4 to the next highest, and so forth. Stocks are roughly normally distributed across Diamond Ratings. Our tests reveal that subsequent stock performance is positively related to the stock’s Diamond Rating

How old is too old?

Many question the usefulness of stale holdings data for constructing stock portfolios. However, we and others have determined that the “shelf life” of equity fund holdings data is at least a year. That is, fund holdings data, as old as one year, allows for the construction of stock portfolios that subsequently outperform, albeit with performance diminishing with holding age. Seventy five percent of the holdings data received monthly by Athena from Thomson Reuters is three months or newer.

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.