Mark Sellers has some interesting insights about institutionalised money managers at FT.com's column. The "institutionalised idea" comes from the movie The Shawshank Redemption (it's also one of my favorite films).
- Institutionalized
- “These prison walls are funny. First you hate ’em, then you get used to ’em. Enough time passes, you get so you depend on ‘em. That’s institutionalised.”
- Institutionalised money managers
- The average actively managed mutual fund in the US holds about 100 stocks. This means the managers can’t possibly be doing in-depth research on each company they hold.
- The reason for holding so many stocks is that you feel you cannot understand any single company well enough to assess the risks, and so you are going to hold many stocks to minimise the risk of being wrong on any single one.
- The most common way is for a manager to figure out what sectors they want to overweight or underweight and then have their analyst staff figure out which stocks to buy based on targeted sector weightings.
- The optimal sector weightings change daily based on valuations and momentum and other factors, and so managers have to continually re-balance their portfolios.
- For a manager, risk is defined as deviation from the index. For an investor, risk is defined as losing money.
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