A recent paper attempts to isolate the impact of active share* on performance by examining product pairs – portfolios that differ in degrees of concentration.
Asset growth: Product pairs are managed by the same team/individual with the same basic strategy and benchmark. Asset growth in diversified portfolios has outpaced that of concentrated products.
Conviction: Concentrated products have a higher level of conviction vs. the less concentrated diversified portfolio. Concentrated products had higher active share relative to their benchmark. Forty-five percent of them had active share values above 90%.
Good and bad: Quarterly return statistics show concentrated portfolios produced superior excess returns, but higher standard deviations. From a drawdown perspective, however, concentrated portfolios exhibited a lower risk profile.
*Active share represents the percentage of holdings in a portfolio that differ from its benchmark. Source: “Active Share and Product Pairs Analysis,” Gregory C. Allen, Callan Associates
Compiled and designed by Timothy Pollard and Gregg A. Runburg