CFA Institute on Relative Importance of Stock-Picking: Focus On What Really Matters

May 09, 2011

"There is now a greater understanding on the part of institutional investors that asset allocation is the issue rather than stock picking.” The CIO of a pension fund in northern Europe concurred: “Strategic asset allocation has always been a more important driver of returns than the selection of asset managers that pursue outperformance vis-à-vis a market benchmark.”



CFA Institute Publications Link believes that exchange traded funds will increasingly be viewed as the core building-blocks of modern portfolios -- not individual stocks. There is much larger value to be added in the decision to own the Australian market (EWA) and REITs and Commodities than spending too much time on the decision of which large-cap United States stocks to own.

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Comments (2) -

May 09, 2011 18:06 #

As ETFs become ever more finely divided, I wonder whether the smaller subdivisions will behave more like individual stocks than asset classes.

Jim United States

May 10, 2011 06:25 #

That is a good point but one thing to add is that normally,  a fund manager will be long X number of stocks and replace them but remain invested in stocks.    If they go sell General Electric to buy Wells Fargo preferred stock --- then that is very different thing than selling General Electric to buy Wells Fargo stock.      So if you are just replacing one security for another in the same group, the amount of value add is limited ---- there is still room to add value of course, its just that the magnitude of the move is less than a move outside of that particular group.

So with ETFs you are right that it would be possible to do what a stock manager does ---  if you are selling KBE (Bank ETF) and buying MGV (a large cap value ETF) --- that is going to cause a change in portfolio performance --- but not of high magnitude.

Chris United States

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