Performance dispersion is the distribution of medium-term price trends in any chosen investment universe.
For example, in 2022 the S&P 500 lost 19%. The bottom top 25% performers posted an average loss of 44%, while the top 25% performers recorded an average gain of 22%. The differential is massive.
Performance dispersion is a fact that can be observed all the time in any basket of stocks (Market Cap, Value, Growth, ESG, etc.).
Hos is it Produced?
Price trends are governed by a variety of factors:
- Global economic developments.
- Shifting investor sentiment.
- Increasing momentum investors.
- Social media.
- Faster money flows.
All these factors contribute to the creation and acceleration of trends. Price trends of stocks are less and less correlated to fundamentals. Fundamentals can easily change in a fast-changing macro-economic environment and a global competitive and evolving landscape. At the same time, the above-mentioned factors are increasing the influence on creating and accelerating price trends.
What Is the Impact for an Active Manager?
Performance dispersion is the big opportunity and also the big challenge for active equity portfolio managers. It provides a gold mine for investors that have the tools to capture a reasonable part of the winners and avoid most of the big losers at any time.
Exploiting the dispersion is a pragmatic, logical way to generate superior returns and beat the benchmarks. At the same time by effectively profiting from dispersion a manager can most effectively control the trend risks that can produce losses across holdings and negatively impact returns.
What Do You Mean by Trend Risk?
It is the risk of holding stocks that despite good fundamentals and positive ratings by analysts start falling and experience a bear trend whose duration and magnitude is impossible to forecast. As well, following new investment ideas in securities that in the face of whatever quality screening are displaying a weak price action, that con continue for months and quarters.
Both can severely impact the performance of a portfolio. On the other hand, by simply adding a layer of price trend validation it is possible to achieve a more robust and complete decision process.
How Can I Control the Trend Risk?
Assessing the true direction and quality of price trends, measuring the aggregated investors’ money flow in and out of a stock requires specific analytics, based on well tested models that can handle the price noise and volatility and can work across different market cycles (bull, bear and ranging markets).
Trendrating across years of extensive testing developed a simple and effective multi-factor model that provides a rating of trends, differentiating bull trends (A and B rated) from bear trends (C and D rated).
What Is the Rationale Behind Trendrating Advanced Analytics?
The ability to capture trends, profiting from bull markets and avoiding bear phases is the key to superior performance on a consistent basis. Investors that have a good understanding and a disciplined respect for the specific price trend of securities outperform competitors. Any investment strategy can be enhanced by a better synchronization to trends developments.
Most investors use numerous metrics based on fundamental and quantitative data, but very few measure in a proven, objective, systematic way, the real direction of price trends and remain hostage to market noise and opinions, despite the fact that capturing trends is the key to better returns.
Trendrating fills a critical gap of market intelligence by providing a methodology to support a better synchronization for individual stocks and sectors trends, that makes the investment decision process more accurately informed about the factor that impacts performance the most – medium term trends.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.