Sell Discipline and Institutional Money Management
Posted: 25 Jun 2014
Date Written: 2004
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: Suggested Citation