Active equity managers are facing a rough operating environment on many fronts. Institutional investors are seriously looking to allocate from active to passive solutions in many of the efficient markets, such as the U.S. In a recent article, Investment Pensions Europe (IPE) stated that, “Given the increasing competition from passive, smart beta and quantitative approaches, fundamental (active) managers need to be able to articulate why their process works and why it should continue to work into the future.”
When competing for active mandates in the crowded marketplace, equity managers have to prove their worth by creating a compelling story for their investment approach as consultants and institutional investors are looking for products that have unique positioning compared to their peers.
The situation is especially pressing for managers who are in investment universes that have been consistently losing assets in recent years. As an example, U.S. Large Cap Growth Universe is the third largest investment universe globally, with about $1.2 trillion in AUM. In the last two years, the universe has lost about a total $206 billion in assets, about $26 billion on average per quarter.
Despite having negative outflows for the past several years, the U.S. Large Cap Growth Universe has still experienced inflows of $10 billion or more per quarter, signaling substantial upside potential. But managers need to be very careful about how to distinguish themselves from their competition.
As an example, let’s take a look at a product in the U.S. Large Cap Growth universe. This product has had lower than average performance in the universe, but has still been able to attract flows of over a billion in the last year.
Dedication to your style
In the last year, consultants that we have worked with have been consistently emphasizing the importance of portfolio concentration. If you have a clear investment focus, demonstrating how different you are from the index and your peers can be really powerful. Let’s take a look at our example Large Cap Growth manager, who on average has between 20-30 holdings at any given time. Using the charts below, the manager can explain the unique positioning of their portfolio compared to the index and their peers.
When comparing the strategy to the index, it is evident that the manager’s positions are significantly different from the index. The PM is clearly taking active bets in the various cap sizes. For instance, the percentages of the portfolio in the Large Cap Growth and Core spaces are significantly smaller compared to the index. It also seems like the manager is actively managing the amount of cash in the portfolio to take advantage of opportunities in the marketplace.
As we can see, the peer universe looks a lot like the index. Being able to contrast your portfolio to both the index and the peer universe proves to the market that you are a truly active player with a unique investment philosophy.
Differentiating holdings compared to your peers
The goal of active management is to create excess returns. Presenting your stock selection compared to others will help you show your unique approach. For example, you could identify the ten most invested stocks in the Large Cap Growth universe and compare to your own holdings. For this example strategy, it is evident that the manager only holds three of the top ten holdings. In those three instances, the manager’s position differs significantly from peers with a significant overweight position in Apple and Visa, while holding a substantial underweight position in Alphabet.
Making the most out of each opportunity
A consultant who spoke at one of eVestment’s breakfast events earlier this year stated that “it is very important to bring the right people to the meetings.” He added that demonstrating a passion for the strategy can also play into the success of the meeting. When considering active managers and key competitive advantages of a strategy, investors typically want to speak to the person who can deliver the insights on the day-to-day investment decisions.