Passive investing (managers who track a benchmark) is all the rage, but active investing (managers who try and beat the benchmark) may still have a place as long as it’s the right active. What is the right active? The answer is different for every investor, but those looking for managers who have the best potential for outperformance versus a benchmark may want to look for the following manager traits:
- High active share (i.e. holdings that differ from the benchmark). You can’t beat the benchmark if you are the benchmark. Along the same lines…
- Minimal holdings. Enough to get adequate diversification*, but still get good exposure to best ideas. But not too much…
- Manageable high conviction. If too much capital is tied up in one or two stocks the probability of a blowup (large loss that is hard to recover from) may increase.
- Low turnover. Low turnover = lower trading fees + lower taxes = higher odds of outperformance. It’s also indicative of…
- Long-term focus. Stock prices ultimately may reach their fair value; however, it can take years to get there (i.e. stocks that are undervalued can remain so for a period of time).
There are more things to look for, but this is just a start to narrow your selection. Does it guarantee future outperformance? Of course not. You can however blend a few together in the event one manager lags.
*Diversification does not guarantee a profit, or protect against a loss.
The above charts are for illustrative purposes only and do not attempt to predict actual results of any particular investment.
Image Source: Think Advisor