Asset owners are being told they need to stop accepting mediocre performance from their external equity fund managers, and look at hiring more managers that follow a high ‘active share’ approach. Melbourne-based superannuation fund Cbus is on board with this thinking.
A study of actively managed global equity funds, published this week by consultancy Willis Towers Watson, shows that of 977 funds, only 26% outperformed the benchmark after fees over a five-year period. Moreover, most (72%) of these outperformers pursued a high-active-share investing approach; that is, they had a high percentage of stock investments that varied from the benchmark.
It is therefore key for asset owners to review their equity set-up, said Mark Brugner, head of research for investments in Asia Pacific at WTW, in an interview with AsianInvestor.
Brett Chatfield, head of public markets investments at Cbus, agreed. “[Active share is] certainly one measure that can demonstrate to what extent managers are taking truly different positions to the benchmark,” he told AsianInvestor.
"Also, it can be more of a pure statistic than tracking error, which can often be generated by regional bets or sector bets. Active share is a purer stock-picking measure.”
Streamlining the manager roster
Chatfield said Cbus reviewed its equity manager roster two years ago and decided to streamline the portfolio, reducing the number of managers.
The fund targets benchmark (MSCI World) plus 1.5% performance over a five-year rolling period. Over the last 12 months Cbus has returned 2.4% above benchmark and about 1.8% per annum net of fees over the past five years, said Chatfield.
“That’s been driven by having quite a concentrated list of managers,” he noted.
Under the revised structure, Cbus effectively has a small selection of high-active-share fundamental managers, alongside two factor-based strategies: low volatility and value. In addition, it has some passive, market-capitalisation-based exposure.
“You get low-cost passive and factor exposure and then have a small number of high-conviction managers,” said Chatfield.
A high-active-share equity manager conviction strategy is generally highly concentrated, with an allocation to perhaps just 20 stocks and a portfolio markedly different from the underlying index.
Chatfield said a small selection of high-quality managers could put together a relatively concentrated portfolio of good stocks that will outperform, particularly in a highly volatile market environment.
However, Cbus does not rely solely on managers’ active share measure, said Chatfield. “I don’t think you want to get too caught up in any one specific measure. We look at active share, tracking error and the contribution to active risk of adding managers into the mix.
“Just because something has a high active share, it’s not necessarily going to do well,” he added. “But there have been studies through time showing that the better performing managers tend to have a high active share.”
Brugner told AsianInvestor: “The conundrum for asset owners is that on the one hand global equity still forms a large part of their portfolio and they need it to meet their long-term targets. On the other hand, return expectations are lower, and many asset owners have been very disappointed with the performance of their asset managers.”
For asset owners that lack the resources to replace underperforming managers, the solution is increasingly to go passive. For others, Brugner said that if they were prepared to weather underperformance at times, it did make sense to go active.
But he cautioned that many equity products and strategies that asset owners are using were not very well constructed.