The "Best Ideas" Portfolio: A Shortcut to Great Businesses
No noise. No predictions. Just structured thinking on equity investing.
The long-term underperformance of most actively managed funds relative to their benchmarks has long been documented.
But this fact isn’t a clear indictment of fund managers’ skill. It reflects mostly systemic constraints, fee structures, and poorly aligned incentives.
The good news for us is that the data shows we can still extract high-quality company ideas from all that noise.
The “Best Ideas Portfolio”
In a 2021 paper, Antón, Cohen, and Polk study U.S. equity mutual fund portfolios from 1983 to 2018. They extracted each fund’s “best ideas.”
A best idea is defined as the position that is most overweight:
relative to the fund’s own portfolio
relative to the fund’s benchmark (S&P 500, Russell 2000, etc.)
In other words, these are the companies in which managers have their highest conviction.
When we look at the performance of these companies, we see the following:
An annual abnormal return of about 2.8% to 4.5% relative to standard factor benchmarks and to the rest of the managers’ portfolios.
F…
