Even so, relative value stocks can be just as costly. "With relative value, you're introducing another influence, which is the sector or industry influence," he explained. "If you're trading a stock that's undervalued but the sector is in favor, it's almost a double whammy because the stock is going up because the whole industry is going up. You're competing with people who are value players and people who are momentum players."
In general, growth stocks, often referred to as momentum stocks, cost about seven times as much as value stocks to trade, according to Marie S. Konstance, director of sales and product management at JPMorgan Plexus, who works out of the firm's Brooklyn, N.Y., office.
"You can actually sometimes make money trading (small-cap) value," she said. "Small caps trade differently than large caps. With large caps, there's always liquidity, but small caps trade almost by appointment. If you want to get something going, you have to prime the pump and put something out there to attract liquidity. A value manager can respond and make money providing liquidity."
She said at the best institutional investors, the portfolio managers and traders are in close communication.
"The best portfolio managers don't hamper the trader with a lot of rules," she said. "They don't do things like tie them up with pairs — sell one thing and buy another immediately. That really cuts into performance, especially in growth stocks."
Focusing on trading costs and how to minimize them through managing the timing and market impact can have a big impact on a portfolio's performance, particularly in a low-return environment.
"If I cut my transaction cost by five basis points a year in a fund that has 200% turnover, that's 20 basis points of performance," said Ananth Madhavan, global head of trading research at Barclays Global Investors, San Francisco. "That's a direct benefit of trading better, but there's also indirect benefits of ordering shares better.
"Having real-time information about where the liquidity is and what the costs are is very important in trying to come up with the correct allocation of shares," he said.
At BGI, "we can provide the trading desk with signals as to the urgency and speed with which they do certain trades, and the trading desk is trying to get back (to the portfolio manager) ‘color' on liquidity and the trading environment that day," Mr. Madhavan said. "It's a very interactive process, and that's the way you want it to occur."
"Most portfolio managers spend 99% of their time on stock selection and they then think their job is done," said Nikos Monoyios, senior vice president at OppenheimerFunds, New York, and head of its Main Street group, which manages about $21 billion in quantitatively driven small-cap, large-cap and multicap strategies in both growth and value. "We believe very strongly there are two other steps that are equally important — portfolio construction and implementation."
Real-time information about a stock's liquidity and its market can go a long way in helping a portfolio manager make the right portfolio construction decision, which will keep transaction costs down, BGI's Mr. Madhavan said.
Mr. Monoyios, however, said portfolio managers tend to be "sloppy" both in portfolio construction and implementation — moving in and out of stocks too quickly, creating unnecessary market impact — which leads to underperformance.
"We found that by paying a lot of attention (to portfolio construction and implementation) we've been able to reduce our trading costs both on an absolute basis and relative to our benchmarks," he explained. "That adds to the bottom line."