In the world of active management where fund managers are paid higher fees to outperform their benchmark, it is a wonder that many are able to keep their jobs. Often the underperformance is a result of building a portfolio too similar to the benchmark which, once accounted for fees, often fails to deviate far enough from benchmark returns and inevitably means underperformance.
In a study from Cambridge Associates in 2014, it found that the best way to find managers that can outperform their benchmark is to concentrate on managers that have a high active share and manage concentrated portfolios. The argument being that in order to generate returns different than the benchmark, the portfolio must look different than the benchmark. Where the implications really hit home is when investors relate their portfolios and returns to the fees that they pay. What is amazing is that only 29% of active US Equity mangers have beaten the S&P 500 in 2019[i].
Even still, only 20% of the assets managed in US equity mutual funds over the last decade were held in funds with an active share over 80%. With the average active share around 76% – slightly lower than what is defined as “truly active” at 80% – par for the course is to look less differentiated so when considering managers, try to ensure that you are investing in a consistent trusted process with a portfolio that differs from the index.
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