Portfolio Management

If you, like many asset managers, manage against a benchmark then you have some sort of benchmark index, let's say the Dow Jones Index or the S&P 500 that you try to beat. So what you do is that you mimic the composition of the index (to a bigger or smaller extent) and then you go "overweight" or "underweight" certain stocks or industries or countries. So you'll say: "I think that in the current recession consumer staple stocks will do better than consumer discretionary stocks because in a recession people will trim down on their discretionary spending and stick with whatever is necessary." And if CS stocks are 20% of the index you might allocate 30% or your portfolio there. Conversely, if CD stocks are 15% of the index you might go underweight to 10%, i.e. "go underweight 5%."

If you wanted to, you could put that on a scatterplot like the following:



On the horizontal axis would be how much you are overweight or underweight (for let's say a certain sector) and on the vertical axis would be how much that sector out- or underperformed the broader market. You'd have a point for each time period, like for each month or quarter or over whatever investment horizon you make your decisions.

Your optimal graph would look something like this, where most of the time you are overweightin the sectors that outperform and underweight in the sectors that underperform.

If, however, you're an unnamed asset management firm then your graph looks like this:
I have no idea how that stacks up against other asset managers but there are essentially two possibilities:
a) This firm is not that great at selecting the right assets (and outperformance comes from something else, e.g. liquidating when the market tanks, luck, who knows?)
b) Everyone is like this corroborating a theory that asset prices operate in a very complex system and that nobody really has the means to make good educated guesses which assets are more likely to outperform.
c) Everyone is like this but the picture is misleading and even a small margin of better bets vs. worse bets leads to outperformance over the long-run.