Active investment manager portfolios and preferences for stock characteristics: Australian evidence*

This paper investigates the stock characteristic preferences of active Australian equity managers. We examine the following characteristics: stock price variance, momentum, size, transaction costs, earnings yield, analyst coverage and the standard deviation of analyst forecasts. 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 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 find evidence of momentum trading in large stocks, and higher volatility and wider analyst coverage amongst small stocks. Active managers are also evaluated on the basis of size and investment style. Small investment managers exhibit a preference for stocks with higher volatility and analyst coverage (including consensus of forecasts). Finally we find evidence of an industry effect, where GICS classifications have an important impact on the stockholdings of Australian institutional investment managers.