Portfolio performance of European target prices

This paper explores the performance of actively managed portfolios constructed based on target price recommendations provided by analysts. We propose two methods for constructing portfolios using Bloomberg's 12-month target price consensus, which we use as a signal to buy or sell assets. Using a sample of 50 European stocks over a 15-year period (2004-2019), we compare the per- formance of target price-based portfolios to traditional alternatives such as a naive homogeneous portfolio and the Eurostoxx 50 index, as well as to passive portfolios based on mean recommen- dations. We also examine the mean-variance efficiency of these portfolios and find that they all exhibit similar levels of efficiency, with theoretical tangent portfolios vastly outperforming all others. Our results indicate that target price-based portfolios show performance very close to that of the naive homogeneous portfolio. Even the passive "mean" portfolios, which require pre-knowledge of targets for the entire investment period, are unable to outperform the naive portfolio. We also investigate the impact of rebalancing on portfolio performance and find that it does pay off in the long run (over an 8-year investment period), but that the frequency of rebalancing matters. Rebalancing only once a year is as detrimental to performance as not rebalancing at all. However, it is unclear whether the transaction costs associated with frequent rebalancing would offset any relative outperformance. Overall, our study contributes to the literature on portfolio management by showing the po- tential benefits and limitations of using target price recommendations to construct portfolios, and highlighting the importance of carefully considering rebalancing strategies in order to achieve op- timal performance.