Portfolio Performance of European Target Prices

Abstract

This paper examines the performance of actively managed portfolios constructed using target price recommendations provided by analysts. We propose two methods for constructing portfolios based on Bloomberg’s 12-month target price consensus, which serves as a signal to buy or sell assets. Using a sample of 50 European stocks over a 19-year period (from 1 April 2004 to 31 March 2023), we compare the performance of target-price-based portfolios to traditional alternatives, such as a naïve homogeneous portfolio and the Eurostoxx 50 index, as well as to passive portfolios based on average recommendations. We also look into the mean-variance efficiency of these portfolios and find that all exhibit similar levels of efficiency, which are well below the performance of the theoretical tangent portfolios. Our results indicate that target-price-based portfolios show performance very close to that of the naïve homogeneous portfolio. Even the passive “average” target price portfolios, which require previous knowledge of targets for the entire investment period, are unable to outperform the naïve portfolio. Our main findings are based on a 15-year investment horizon but are robust when considering smaller maturities and out-of-sample data. We also investigate the impact of rebalancing on portfolio performance and find that it does pay off in the long run (over an 8-year investment period), but the frequency of rebalancing matters. Rebalancing only once a year is as detrimental to performance as not rebalancing at all. However, it is unclear whether the transaction costs associated with frequent rebalancing would offset any relative outperformance. Overall, our study contributes to the literature on portfolio management and market efficiency by demonstrating the potential benefits and limitations of using target price recommendations to construct portfolios, highlighting the importance of carefully considering rebalancing strategies to achieve optimal performance.