At our most recent Investment Forum in Hong Kong, we discussed how the active-management industry is finding it increasingly difficult to deliver an active return for clients, particularly with regard to equity investments.
This challenge can be seen by examining the Mercer database over the last two decades. Lower volatility has driven down tracking errors and active returns, and the increasing homogeneity of the asset-management business — including the use of commonly accepted sector definitions and risk models, and the secular rise of indexing — has led to an increase in correlations.
Yet there is clear evidence that the more active managers are, the better the expected performance. Indeed, the Mercer database confirms that active managers have delivered solid performance over the long term (see chart).
Active Equity Managers Have Generated
Relative performance of global equity managers since
Substantial Value Over Time
1994 has slowed in recent years.
Source: Mercer Global Investment Manager Database,
Allianz Global Investors as at 31/12/2013.
Past performance is not a guarantee of future results.
So what should active managers do to help their clients in this new environment? Well-known research from the Yale School of Management has shown there to be two effective ways for managers to generate alpha: focused stock picking and diversified stock picking.¹
Focused stock pickers’ portfolios have a smaller set of conviction investments and tend to be more highly concentrated — generally in the range of 40-50 securities. These portfolios typically generate a higher “active share” and higher tracking errors, and tend to succeed more in an environment of less-constrained investing.
(Active share is a relatively new measurement that gauges how active a portfolio manager really is by calculating the sum of all positive, active single-stock overweights. In essence, the higher a portfolio’s active share number, the less similar it is to its benchmark.)
Conversely, diversified stock pickers’ portfolios generally have a lower tracking error but still have a high active share — although slightly lower than that of focused stock pickers.
Of these two “sweet spots”, more of AllianzGI’s equity portfolios sit in the concentrated stock picker’s camp than the other. We have demonstrated abilities to generate high alpha for our clients, either in a benchmark-relative core equity setting or a benchmark-agnostic unconstrained setting.
We also have strong product offerings in the second camp — diversified strategies that combine a high level of active share with a low level of tracking error, producing alpha that is attractive both in terms of level and stability.
Yet perhaps most important of all, our focus has consistently been on improving our ability to select the right securities and capture big trends — including expanding our unconstrained investing capabilities:
||We have increased our research coverage, from 300 stocks to more than 2,000.
||We have increased our focus on picking high-conviction ideas and promoted deeper analysis by narrowing the number of stocks our analysts cover.
||We have launched an unconstrained equity product line that implements our views in unconstrained and focused portfolios.
In this ever-changing landscape, our purpose remains the same as it has always been: to help our clients achieve their investment goals. To accomplish this, and to drive performance, we are committed to continually evolving our capabilities as an active asset manager for the benefit of our clients.