At Cerno Capital, we believe in a) the ability of some managers to outperform and b) our ability to identify them. The track record of outperformance of our approved list is contained in the below chart.
Against this, we entirely concede the point being made repetitively by academics and journalists alike that the average active manager does not outperform an appropriate index by a significant margin. It is, though, an error to conjure this observation into a theory that markets are “efficient” and therefore an indexed approach is appropriate.
That the “average manager” does not produce returns which are statistically different from the appropriate index is hardly a surprise. This average manager is typically highly constrained in terms of the level of benchmark relative risk taken (no bad thing given an average level of ability) and must incur the costs of implementation not applied to benchmark indices. Faced with the choice of allocating capital to the average manager or a passive index tracker, the choice of the latter is understandable, albeit a significant compromise.
Study of the evidence of manager returns reveals that there are a small number of active managers in some market segments who are able to generate significant outperformance over prolonged periods of time. Furthermore, our long experience of manager observation and evaluation has taught us that the consistently successful active managers are identifiable due to consistent characteristics which are identifiable on a repeatable basis.
The Cerno Capital approved list of managers covers a range of strategies and is highly focused in each subsector. The following chart demonstrates that excess returns have been generated by this list. All figures are net of active management fees. We use this as support for our continued search for highly skilled active managers.
(Note: current allocations to active managers account for 40% of assets within our core strategy. We do not operate a maximum or minimum boundary for these allocations in aggregate. The decision to invest is based on identification of opportunity and assessment of how best to express that opportunity: whether active, tracker or direct securities).