Willis Towers Watson research finds that 72% of outperforming funds had high active share (“Tired of too little alpha? Try going high-conviction,” P&I, June 26). We need to be careful about cause and effect here. Active share, like tracking error, is a measure of conviction, a necessary condition for alpha, but it is insufficient — you need to also be right. Big bets can lead to big wins or big losses. To win, managers need conviction, and (this is the big caveat) they need to be right. Something is categorically wrong with an approach that concludes that conviction alone is a predictor of success. Life is just not that simple.
Active share is a fad, and like most fads, it will fade away.
It's interesting to note how investment fads work. In the 1990s, Lockwood won a lot of business by emphasizing big bets: Give me your best shot, and I will diversify around you, like using a core portfolio. Then in the 2000s Barclays convinced consultants that tracking error was risk, so the four-corner solution emerged with its strong preference for style purity with small bets. Now we're back to preferring big bets. "Active share" is the "new" alpha predictor. What goes around comes around.
Ronald Surz is president of PPCA Inc., based in San Clemente, Calif.