Manager Selection

Active Management: Identifying Outperformance

By | 2015-07-08T09:32:04+00:00 July 8th, 2015|Asset Allocation, Cerno Capital Posts, Cerno Capital Posts, Manager Selection|

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 [...]

What's So Special About Active Share?

By | 2015-02-13T14:32:50+00:00 February 13th, 2015|Cerno Capital Posts, Cerno Capital Posts, Manager Selection|

In short, not much. Like any attempt to reduce a complex process to a digit, it fails as an investment assessment tool. “Active Share” is the number you get when you sum the difference between the weight of a stock in a portfolio and the weight of that stock in an appropriate benchmark for all stocks in the benchmark. The maximum score on this basis is 200%. We can simply divide by two or agree to only sum the overweight positions to arrive at a figure where the maximum score is 100%. The score is an attempt to measure the risk that fund is taking – but note that we are talking about relative risk versus an index rather than absolute risk (the probability of a permanent loss of capital). By using current holdings, the score is not a rear view mirror measure of relative risk in the way that tracking error (the standard deviation of relative returns) is. It is not a new concept. This analyst well remembers being admonished by his CIO for calculating such a “one dimensional and potentially misleading metric” in 2003. The measure was given academic credentials in 2006 by Martijn Cremers and Antti Petajisto [...]