PORTFOLIO TILTING: HUNT FOR POSITIVE ALPHA THROUGH STYLE TILTS MUHAMMAD WAJID RAZA 1 ,HASSAN MOHAMMAD MOHISN 2 1 Department of Management Studies, Shaheed Benazir Bhutto University Sheringel Dir KPK Pakistan Affiliation of First author Wajidrazauom@sbbu.edu.pk 2 Department of Economic, Pakistan Instutute of Development Economics Islamabad Pakistan. hasanmohsin@pide.org.pk Received May 2014 ABSTRACT. A long discussion in literature exist to answer the question how a fund manager can generate extra returns? In order to answer the question this study is concerened with two aspects of this problem. First at discuss the portfolio construction process from separation theorem to modern style tilts. And in second step it provide imperical evidence for superior performance of style tilts. First of all active and passive style of management are compared. Data on returns is taken from KSE for five years and two sets of style based portfolios are constructed. Strong evidence is found in favor of active style of management. Actively managed funds are used as proxy for tilted portfolios. Data of Net asset value is taken from MUFAP. Tilted portfolios are tested for Size and value tilts. This study confirms higher performance of portfolio with style tilts. Keywords: Portfolio tilting, size, B/M value Studies conducted by Basu [1983], keim [1983] and Fama & French [1992] have shown that stocks with smaller size “market capitalization” and high B/M value have generated hig her returns for investors. Similar results can be observed for stocks selling at low multiples of their sales. The superior performance of value stocks and small cap stocks has provided new direction for portfolio tilting. This study is concerened with two aspect of this issue. First at discusses the portfolio construction process from separation theorem to modern style tilts. And in second step it provides imperical evidence for superior performance of style tilts. 1. Journey from separation theorem to style tilts It is very difficult to allocate proper assets mix when the investors have multiple options for investment. In earlier ages investors were limited to investment decisions that pertain to a specific security only. Concept of diversification with statistical measures by Markowitz [1952, 1959] opens a new era in portfolio theory. In contrast to single asset he introduce concept of large numbers. With large number in mind best available tilting option was to tilt the portfolio to maximum possible securities. Most prominent drawback of portfolio tilting based on large number is that it ignores risk factors associated with each security. Moreover, the underlying assumption of his work mean variance efficiency is of importance only if returns from securities are uncorrelated. Otherwise manager must tilt his portfolio to stocks with minimum correlation. Another problem arises when managers have to deal with multiple time period data. In order to address the issue researchers address the problem with different set of assumptions Fama [1970], Hakansson [1970, 1974] and Merton [1990]. These studies found that, portfolios that are constructed on the basis of multi period data are significantly different from single period portfolios. The difference arises because of the utility function “time series data”. Another important aspect of portfolio theory is the separation theorem. That is, if an investor has access to riskless asset, he will tilt his portfolio to mix of risky assets and risk free assets. The separation theorem thus proposed has three implications. First of all it provides ease in calculation. Problem faced by portfolio VFAST Transactions on Education and Social Sciences http://www.vfast.org/index.php/VTESS @ 2013 ISSN: 2309-3951 Volume6,Number2,March-Apirl,2015 pp.25-41