Investment Style Preference and its Effect Upon Performance of Tracking Portfolios

• Main Authors: Martin Boďa, Mária Kanderová
• Format: Article
• Language: English
• Published: Mendel University Press 2017-01-01
• Series: Acta Universitatis Agriculturae et Silviculturae Mendelianae Brunensis
• Subjects: investment style; market capitalization; value/growth; Fama‑French classification; performance; linear tracking
• Online Access: https://acta.mendelu.cz/65/6/1851/

Any task of portfolio creation requires that a suitable pre‑selection of assets is made, out of which the resultant portfolio is to be formed. Several approaches in passive investing implemented through portfolio tracking are applied in practice, and assets are pre‑selected frequently on the basis of their capitalization or value/growth potential. The paper studies to which extent the investment style practiced by a small investor affects the performance of the tracking portfolio. The design of the analysis is experimental and hinges on tracking the S & P 500 Index in three different periods with assets pre‑selected by diverse investment styles. Taking the approach of with linear and quadratic tracking, two factors are analyzed on that occasion: the investment style (big vs. small market capitalization, value vs. growth assets, Fama‑French stratas of assets) and the number of assets (10, 20, 30, 40, 50 assets). It is found that while small market capitalization portfolios were preferable in the first two parts of the investigated time frame, this pattern ceased to hold in the third last part with no guidance for a recommendable investment style.