Sell Discipline and Institutional Money Management

Posted: 25 Jun 2014

See all articles by Christophe Faugère

Christophe Faugère

Kedge Business School Bordeaux

Hany A. Shawky

State University of New York at Albany - School of Business and Center for Institutional Investment Management

David M. Smith

State University of New York at Albany - School of Business

Date Written: 2004

Abstract

In this paper, we investigate the impact of using different sell discipline criteria in the management of equity portfolios. We examine the differences among the sell discipline criteria with respect to the portfolio’s risk-adjusted returns and downside risk. We use an institutional money management database, PSN, which covers over 7,000 investment portfolios. Our sample period spans two distinct market conditions. The first period (January 1996-March 2000) represents a rising market, while the second period (April 2000-December 2002) represents the subsequent market decline. We find evidence that portfolio performance is strongly related to the choice of sell discipline criterion. Specifically, we find that during the rising market period, the Fundamental Deterioration Overview method of sell discipline produced the highest risk-adjusted returns. During the period of market decline however, we find the Valuation Level sell discipline criterion produces the best portfolio results. The Target Price criterion was the second best in both market periods. These results are robust even when we correct for the potential effects of investment style leadership changes over the period. These findings suggest that in rising markets, institutional money managers are likely to benefit from using less restrictive sell discipline criteria, while during declining market periods, institutional money managers might benefit from a more restrictive sell discipline criterion. The main implication therefore, is that the effectiveness of the various sell discipline criteria is heavily impacted by market conditions.

Suggested Citation

Faugère, Christophe and Shawky, Hany A. and Smith, David McNeil, Sell Discipline and Institutional Money Management (2004). Journal of Portfolio Management, Vol. 30, Spring 2004. Available at SSRN: https://ssrn.com/abstract=2458614

Christophe Faugère

Kedge Business School Bordeaux ( email )

680 Cours de la Liberation
Bordeaux, Aquitaine 33405
France

Hany A. Shawky

State University of New York at Albany - School of Business and Center for Institutional Investment Management ( email )

School of Business
1400 Washington Ave.
Albany, NY 12222
United States
518-442-4921 (Phone)
518-442-3944 (Fax)

David McNeil Smith (Contact Author)

State University of New York at Albany - School of Business ( email )

1400 Washington Ave.
Albany, NY 12222
United States

HOME PAGE: http://www.albany.edu/ciim

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