1 Capacity Analysis Academic Definitions and Industry Practice The dependence between portfolio performance and size of fund The study of ways to increase AUM for a target level of return Identification of optimal turnover for every level of AUM How to expand fund size while ‘remaining efficient’ Current investment strategy will lose 15 places in its ranking by growing to $5B Based on a peer group of 746 names the fund will likely fall into the second quartile by growing to $6B Growing to $3.5B, while keeping within first quartile, might be possible with careful liquidity planning At a level of $2.5B, there is room to increase turnover
2 An Alternative View of Portfolio Capacity Analysis General themes ex ante versus ex post strategy space underlying investment decisions Fixed portfolio strategy Determination of turnover and net returns jointly Capacity Conclusions Ex post analysis Ex ante analysis
3 Cost and Fixed Portfolio Strategies Daily Market-Impact Costs for U.S. Indices Trade Lists up to $5 Billion
4 Past is Prologue “Optimal” Turnover Optimal Turnover Rates for Different Levels of Assets Under Management
12 Two Lessons from the Analysis Previous focus on turnover as a choice variable, and on its role as a proxy for implementation cost, is misplaced Considering stock-specific transaction costs at the portfolio construction stage enables higher turnover levels Turnover levels are determined through the interaction of alpha predictions and expected cost estimates Managing at higher turnover levels allows for faster processing of new information, and in conjunction with cost control, leads to superior net return Limiting the strategy space within which portfolio strategy is formulated negatively impacts returns and reduces the capacity of a fund Limiting that set of strategies also distorts capacity analysis and biases capacity choice down, in general There is particular importance to adding trading strategy to the strategy space underlying the investment decision
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