Willis Towers Watson PLC is asking asset owners tired of getting more beta than alpha from their equity managers to double down on the pursuit of alpha, and a growing number of the firm's clients could be moving to answer the call, executives there say.
Mark Brugner, Willis Towers Watson's Hong Kong-based director and head of research, Asia-Pacific, said his firm is calling on both consulting and outsourced CIO institutional clients capable of stomaching short-term volatility in pursuit of long-term gains to put all of their equity allocations in actively managed, high-conviction strategies of up to 20 holdings per manager.
The firm's research suggests clients who tap a carefully blended mix of those "best ideas" strategies can more than double their odds of garnering significant benchmark-topping returns over five-to 10-year periods, Mr. Brugner said in an interview.
Willis Towers Watson said in a June 2 news release that its review of 977 global equity funds in the eVestment database found only 256 managed to outperform their MSCI World net dividend benchmark over the five years through March 31, 2016. Of that minority, 72%, or 184, had "high active shares," a term to describe portfolios that differ considerably from their benchmark index.
The firm defines "high active share" as a portfolio that deviates more than 80% from its benchmark, and "active share" for those that deviate between 60% and 80%. Less than 60% earns managers a "closet indexer" moniker.
Compared to the tepid performance delivered by most "overdiversified" equity strategies, asset owners relying exclusively on high-conviction, low-turnover portfolios — with "cost-effective implementation and best-practice portfolio management" — can look to garner annualized returns of roughly 300 basis points or more above the MSCI All Country World index benchmark over periods of five years or more, the firm's research shows, Mr. Brugner said.
Finding skilled managers is the biggest hurdle to pursuing the strategy.
The concept requires "a reasonable amount" of high-conviction strategies to choose from, in order to mix and match strategies that can offer complementary style and factor exposures, said Mr. Brugner.
That demand has left Willis Towers Watson focused, for now, on the broadest universe, the global equities space, where it has been able to identify 15 to 20 high-conviction managers over the past year or two, he said.
It has proven difficult to find a sufficient number of managers running concentrated strategies in narrower market segments, such as emerging markets equities, he added.