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Stock picking in the US market and the effect of passive investments

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  • Carmine De Franco

    (Ossiam)

Abstract

In this paper, we strove to provide evidence about the alleged structural changes in the US equity markets that have dramatically reduced the potential for stock picking strategies to work. First, we designed a simple test that looks, from a macro point of view, at potential common factors that would drive stock prices synchronously. The results are very robust and reject the claim that something structural has changed in the US equity market in the last 10 years, which in turn has made stock picking more challenging. We do not claim that the market today is as it was 40 years ago. Nevertheless, if the potential stock picking is high when the idiosyncratic component of stock returns is high, then the situation today is in line with the pattern we have seen since 1964. We then look at the problem from the point of view of a stock picking manager. We identified three basic characteristics of stock picking strategies (success rate, conviction and consistency) and investigated whether the market has changed in a way that what used to work in the past is no longer working. We focused on the role played by the success rate of stock picking. For this, we designed a test that reveals how a decent success rate would have delivered solid results over time, both in the last 10 years and in the previous forty. With all the limitations of such a test, we can at least draw the conclusion that with a decent success rate stock picking strategies would have delivered outperformance. But the difference between 40 years ago and today is that investors can now have access to passive and low-cost investment vehicles. This in turn increases pressure for stock picking strategies to deliver. But to do so, one needs to increase her own success rate, especially during financial events, when wrong choices are costly, which is objectively a difficult thing to do. On the other hand, greater competition and ease to trade have made investors eager to revisit their choice of manager (overall a positive thing) but also to chase past winners.

Suggested Citation

  • Carmine De Franco, 2021. "Stock picking in the US market and the effect of passive investments," Journal of Asset Management, Palgrave Macmillan, vol. 22(1), pages 1-10, February.
    • Handle: RePEc:pal:assmgt:v:22:y:2021:i:1:d:10.1057_s41260-020-00189-8
    DOI: 10.1057/s41260-020-00189-8
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    References listed on IDEAS

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    Cited by:

    1. Stadtmüller, Immo & Auer, Benjamin R. & Schuhmacher, Frank, 2022. "On the benefits of active stock selection strategies for diversified investors," The Quarterly Review of Economics and Finance, Elsevier, vol. 85(C), pages 342-354.
    2. Immo Stadtmüller & Benjamin R. Auer & Frank Schuhmacher, 2024. "Core-satellite investing with commodity futures momentum," Journal of Asset Management, Palgrave Macmillan, vol. 25(3), pages 261-287, May.
    3. Anja Vinzelberg & Benjamin R. Auer, 2022. "Unprofitability of food market investments," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 43(7), pages 2887-2910, October.

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