The growing focus on active share as a singular reliable guide for future fund outperformance could be detrimental for investors, according to a new white paper published by Hermes Investment Management.
Looks like a lion, manages like a lamb, which explores a body of academic research, has found that the use of a single portfolio attribute – such as active share – does not give a complete picture of a fund’s ability to generate excess returns over a benchmark.
The paper also reveals that simply identifying the correct investment opportunities is not enough for managers to deliver outperformance. This skill must be allied with strengths in other areas of portfolio construction, such as ensuring the size of individual positions is commensurate with the level of risk taken.
Key findings on active share:
The paper also addresses a number of key questions about how applicable active share really is in modern portfolio management: