Strategy Consistency

After determining a fund’s strategy, the next most important consideration is how consistently the strategy is being pursued over time. AthenaInvest has created an objective measure of strategy consistency based on the proportion of stocks held that lie within a fund’s strategy.

Categorizing Stocks based on Fund's Holdings

After all active equity funds are Strategy Identified, it is possible to categorize the stocks held most widely by a particular strategy. For example, the stocks most attractive to Competitive Position managers are referred to as Competitive Position stocks. Similarly, the stocks most attractive to managers pursing the Economic Conditions strategy are referred to as Economic Conditions stocks. Thus each stock becomes a member of a particular strategy stock pool, based on which strategy finds the stock most attractive.

Over time, strategy pool composition changes as managers, responding to changing market and economic conditions, alter their preferred group of stocks. Consequently, strategy stock pools move around the equity universe over time.

The composition of each pool is determined by the collective holdings of all managers pursuing that particular strategy. Strategy pool stock characteristics, such as average market cap and PE, change over time as strategy managers adjust their holdings. Thus it is not possible to describe strategy stock pools using the characteristics of the stocks held. This lack of descriptive power applies to every stock characteristic, not just market capitalization and P/E ratio. Strategy stock pools are defined by the managers that hold them, not the other way around.

This is very different than the current representation in which the equity universe is locked in place by the style grid. In the current paradigm, managers are categorized by the stocks held rather than stocks being categorized by the managers that hold them. Thus in today’s world managers cannot fully respond to changing economic and market conditions because they are confined to a specific style box.

Investing without Constraints

In the strategy stock pool world, managers do not face artificial stock ownership constraints, so they are free to move about the equity universe in search of their best ideas. In doing so, strategy consistent managers develop specialized investment skills. These specialized skills yield the best results when applied to the pool of stocks on which similar managers focus. That is, a manager is most successful when consistently analyzing, buying, and selling their own strategy stocks.

Based on this notion, Strategy Consistency can be measured as the percent of own strategy stocks held by the manager. AthenaInvest has formally tested this notion and discovered, based on monthly January 1997 through June 2009 empirical tests, that the higher proportion of own strategy stocks held, the higher the fund's forward-looking return.

Strategy Focus

The extent to which the manager is able to invest in own strategy stocks is a determinant of portfolio performance. Unknowingly, a successful manager is taking advantage of the collective insight of fellow strategy managers in the process of identifying stocks with the greatest return potential. While not explicitly attempting to do so, the most successful managers are forever pursuing own strategy stocks.

Each manager pursues his strategy, and the strategy group of stocks can only be determined by the collective vote of like managers. As a result, managers cannot "game the system" by buying a narrow range of stock characteristics in order to look like their peers or an index. They in fact have to be relentlessly active to be successful.