Active advantages in 2024
7月 11, 2024
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3 分鐘的閱讀時間
Active investment managers have the potential to dramatically outperform their benchmarks over long periods of time, but not all of them are able to do it consistently. That’s why it’s important to understand the forces that can lead to active success and how they can have a bearing on both fund selection and portfolio construction.
Not all concentration is equal?
Looking across the universe of Global and US large-cap equity funds, both passive and active, the difference in holding levels is significant. As is evident from the graph above, the average active large cap fund holds just over 100 stocks while the average passive fund holds more than 600 stocks. Yet that almost six-fold difference in the number of stocks in each portfolio should not be confused with a greater degree of diversification.
If you look instead at the average percentage of assets within the top 10 holdings, however, the numbers are much closer. Around 45% of the average active fund’s assets are made up of the top 10 holdings, while for their passive counterparts, that number is 40%.
In other words, despite a significantly larger number of holdings, passive funds are almost as concentrated as active funds. Moreover, there is one type of fund where passive funds are more concentrated than their passive counterparts: US Large Cap Growth equities. That passive funds invested in US large cap stocks are more concentrated than their active counterparts makes sense given the dominance of mega cap tech stocks, such as Apple, Amazon and Nvidia, but it also underlines the key distinction between active and passive concentration.
Passive concentration is unintentional, driven entirely by market momentum, which can lead to unintended overweights to specific market forces or sectors. Active concentration, when done well, should be intentional, with a focus on ensuring that each individual holding serves a specific role within the portfolio.
To succeed in this, managers must weigh up the forces likely to drive each individual stock higher or lower and aim to create a portfolio driven by a multitude of different factors, rather than just crowding into the ones with all the current momentum.
Stock pickers need room to shine
A larger percentage of active funds outperform their benchmarks when dispersion is high
Source: Nim Solutions, Morningstar Direct, Bloomberg. As at end Q1 2024.
Stock dispersion, which is the measure of the gap between the highest and lowest performing stocks in an index, is another indicator that tends to signal a favourable environment for discerning active investors. By plotting the gap in performance between the best and worst performing sectors within the Russell 1000 index, we got a proxy for stock market dispersion.
As shown, there is a clear correlation between the level of dispersion within markets and the potential for active fund managers to outperform. The theory being that when everything is moving up or down in unison, the impact of stock selection skill is muted; however, when there is a big difference between the two, which securities one selects has an outsize effect on performance.
That is not to say that active managers automatically outperform when dispersion is high. Rather, when dispersion is high, superior stock selection is likely to have a bigger impact on fund performance than when everything is moving up or down in unison.
In short, finding the right active manager is never easy. But in the current environment, with geopolitical, fiscal and monetary policy uncertainty high, it has seldom been more important. While volatility is noticeably lower than last year, concentration and dispersion remain high. Historically, it is the sort of environment in which true active managers thrive. It’s also the setting in which patience and experience are likely to be crucial to success.
The provision of this material and/or reference to specific securities, sectors, or markets within this material does not constitute investment advice, or a recommendation or an offer to buy or to sell any security, or an offer of any regulated financial activity. Investors should consider the investment objectives, risks and expenses of any investment carefully before investing. The analyses, opinions, and certain of the investment themes and processes referenced herein represent the views of the portfolio manager(s) as of the date indicated. These, as well as the portfolio holdings and characteristics shown, are subject to change. There can be no assurance that developments will transpire as may be forecasted in this material. The analyses and opinions expressed by external third parties are independent and does not necessarily reflect those of Natixis Investment Managers. Past performance information presented is not indicative of future performance.
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