An active fund management firm claims that a tight focus on a single asset class, such as equities or fixed income, will significantly outperform other more generalist strategies and can also beat passive funds after fees.
Active manager Northill Capital analysed the performance of 5,006 long-only equity and fixed income funds over the five years to December 31, 2015, and found the most focused US equity strategies outperformed by 116 basis points (bps) on average per annum relative to their benchmarks, while the average manager delivered only 2 bps per annum.
Northill defines generalists as firms that offer multiple investment strategies managed by multiple teams, each utilising different investment processes and philosophies.
The most focused mid-sized active US equities managers generated average annualised outperformance of 146 bps annually, 145 bps more than the average mid-sized manager.
The notion that focused active managers outperform was demonstrated in all of the asset classes analysed over the period, said Northill Capital. The study encompassed European equities, US fixed income, global equities and emerging market equities.
The report even claims that focused active managers tended to outperform passive mandates after fees, challenging conventional wisdom on the topic. Active US equity strategies offered by the most focused mid-sized managers outperformed by 68 bps, on average, net of fees.
However, the report also notes that the average active US equity strategy underperformed passive mandates by an average 18 bps after fees over the past five years.
A spokesperson for Northill said the outperformance of focused funds was down to firms having a single, repeatable investment process employed by a single team. Such firms have “nowhere to hide”, as a prolonged period of underperformance puts them at risk; conversely, generalists can incubate track records in multiple asset classes, and out performance in one can balance underperformance in another.
The report may offer some comfort to active management’s proponents, as investigations of active vs. passive performance typically conclude the latter vehicles consistently outperform the former.
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