Coveting a neighbor's wife violates the Ten Commandments. Coveting a neighbor's portfolio surely should be equally censorious.
Yet portfolio managers routinely lust after stocks held by nearby competitors, according to a draft study by three economists. What's more, the managers sample the goods.
What's striking about this study is that it looks at the behavior of professional money managers, not the copycat behavior of Joe Investor. Money managers, after all, are paid for their insights, and it's widely stated that managers have a competitive advantage by keeping their holdings quiet — at least when they are building up or selling off positions.
But "Thy Neighbor's Portfolio: Word-of-Mouth Effects in the Holdings and Trades of Money Managers" shows portfolio managers are anything but discreet when it comes to talking about which stocks they like.
"One might think that mutual-fund managers are pretty competitive beasts … (and) might not want to share this type of information," said Harrison Hong, an economics professor at Princeton University, who co-authored the study. Other co-authors are Jeffrey D. Kubik, associate economics professor at Syracuse University's Center for Policy Research, and Jeremy C. Stein, an economics professor at Harvard University.
Arnold Wood, chief executive of Martingale Asset Management LP, Boston, and a behavioral finance expert, said money managers routinely copy each other's stock picks.
"People don't like to not own what other people own," he said. "It's a negative thought: ‘Gee, he owns it and I don't. Maybe he knows something more than I know.' When I'm uncertain, I better be close to my peer group."
Of course, it's not a one-to-one correlation, according to the draft paper. A manager would be expected to boost the holding of a particular stock by 20 basis points if other locally based managers had, on average, doubled their holdings of that stock, while other managers across the country had left their holdings unchanged.
"So if managers at Putnam and other Boston-based fund families increase their average weighting on Intel from 1% of their portfolios to 2%, while other managers across the country keep their weightings fixed, we would expect the typical Fidelity manager to increase her weighting from 1% to about 1.2%," they wrote.