Do high conviction active strategies perform better

Our previous research helped investors and financial advisors develop a framework for equity allocation and where it might be most appropriate to use active, passive, and strategic beta strategies. To help investors make those decisions, we looked at both the propensity of active managers to outperform—and the magnitude by which they outperform—representative indexes in various equity asset classes.

One natural question we’ve heard in response to this research is which specific characteristics investors should look for in active managers who outperform over longer periods. In a new white paper, we attempt to answer this difficult question.

Specifically, we were interested in understanding if managers with high conviction in their process have delivered better results. In other words, we wanted to determine if higher-conviction managers have a higher propensity to outperform their respective index.

One way to measure high-conviction active managers is to focus on high active share and low turnover. Active share measures how different the manager’s portfolio is from the index. We believe that managers with high active share and low turnover do in fact have high conviction in their research, are willing to make large allocations to their best ideas, and have the patience to hold those positions for the long term. Focusing on high-conviction managers also helps eliminate “closet indexers” who charge higher fees but give investors benchmark-like exposures with little chance to outperform.

We found that in most cases, investors should look for active strategies with above-average active share and below-average turnover. The full white paper also shows the breakpoints that investors might want to use as rough guides when sorting active managers by active share and turnover, for various U.S. and international equity categories.

We believe this approach can help improve investors’ due diligence process with some easy-to-follow guidelines on where it makes sense to implement active, passive, or strategic beta.

FOR INVESTMENT PROFESSIONALS ONLY: Explore an in-depth discussion of how to develop a framework for choosing active, passive, or strategic beta in our white paper, "Finding outperforming active strategies using active share and turnover."