Active investment manager portfolios and preferences for stock characteristics*

This study investigates the stock characteristic preferences of institutional Australian equity managers. In aggregate we find that active managers exhibit preferences for stocks exhibiting high price variance, large market capitalisation, low transaction costs, value-oriented stocks, greater levels of analyst coverage, and some evidence of a preference for stocks with less variability in analyst earnings forecasts. The study also recognises the importance of tracking error in portfolio management by examining stock preferences with respect to both small and large stocks. We observe stronger preferences for higher volatility, value stocks, and wider analyst coverage among smaller stocks. We also find smaller investment managers prefer securities with higher market capitalisation and analyst coverage (including low variation in the forecasts of these analysts). Finally, we document evidence of an industry effect, where GICS classifications have an important impact on the stockholdings of Australian institutional investment managers.