A new analysis tool developed by a Brigham Young University business professor will allow mutual fund, pension fund and other kinds of institutional money managers to assess the impact of constraints on the large portfolios they oversee.
"For example, based on portfolio restrictions, some fund managers can't sell stocks short and others can only invest in a certain category of stock," says Steven Thorley, a professor of finance. "These constraints limit a manager's ability to exploit his or her research on individual stocks to maximize portfolio returns."
An outgrowth of a tool created in 1989 called the Fundamental Law, the new analysis tool, called the Generalized Fundamental Law, helps put a number on how well fund managers are able to use stock return forecasts when portfolio constraints are taken into account.
"Quantifying this kind of information is valuable because, although it doesn't lift the constraints under which fund managers are operating, it helps with strategic planning - where should they place research efforts, how should they manage funds in the future and when should they consider negotiating with clients to lift constraints," says Thorley.
A paper describing the analysis tool will appear in this week's issue of "Financial Analysts Journal."
Thorley emphasizes that his analysis tool, developed in conjunction with Roger Clarke and Hanrindra de Silva of the Los Angeles-based investment firm Analytic Investors, only applies to large institutional-sized funds and not to the management of individual investors' portfolios.