We can think of an active equity portfolio as a combination of a benchmark (the S&P 500®, for example) and a set of active bets that measure the portfolio’s deviation from the benchmark. The relative size of the active bets is sometimes called “active share,” and is a convenient way to judge a manager’s aggressiveness….
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Should active managers shift away from well-diversified portfolios and concentrate only on “high conviction” holdings in hope of generating higher returns? We have suggested four consequences — higher risk, greater dominance of luck over skill, higher costs, and fewer outperforming funds — that are likely and logical outcomes of higher concentration. All four apply even for active…
Can active managers improve performance by moving from relatively diversified to relatively concentrated portfolios? Doing so is likely to increase risk, shift the relative importance of luck and skill, and raise trading costs. A fourth consequence is that the probability of active underperformance is likely to increase. A simple example provides some insight. Imagine a market with five…
Some active managers argue that the remedy for widespread active underperformance is more aggressive, more concentrated portfolios. If this is the correct prescription, it has a number of adverse side effects — for example, risk is likely to increase, and the relative importance of skill and luck in decision making is likely to shift in luck’s favor. A…
Is the remedy for active managers’ well-known performance difficulties to become more active? Some observers think so, and argue that less diversified, more concentrated portfolios should be the wave of active management’s future. But there are a number of adverse consequences to concentration — for example, risk is likely to increase. A second consequence is that in manager…
Most active managers fail most of the time, at least if we regard their underperformance of passive benchmarks as indicative of failure. This fact is so well known and widely documented that even staunch advocates of active management acknowledge it. What remains in dispute is what should be done to improve performance. Some argue that active…
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