Interpreting Active Share

Transcription

1 Interpreting Active Share Erianna Khusainova, CFA, Senior Vice President, Portfolio Analyst This material is for informational purposes only. It is not intended to, and does not constitute financial advice, fund management services, an offer of financial products or to enter into any contract or investment agreement in respect of any product offered by Lazard Asset Management and shall not be considered as an offer or solicitation with respect to any product, security, or service in any jurisdiction or in any circumstances in which such offer or solicitation is unlawful or unauthorized or otherwise restricted or prohibited. Information and opinions presented have been obtained or derived from sources believed by Lazard to be reliable. Lazard makes no representation as to their accuracy or completeness. All opinions expressed herein are as of the date of this presentation and are subject to change.

2 Agenda A. Background B. Active share and performance C. A closer look: Limitations and caveats D. Using FactSet to calculate active share E. Conclusion 1 Lazard Asset Management

3 Introducing Active Share A Multi-Decade Debate: Active versus Passive Several studies have been produced arguing about active management s shortcomings. However, aggregation of all active managers may include closet indexers funds with close resemblance to an index, while claiming to be active. Key Studies Emerge Introducing Active Share Cremers and Petajisto (2009) and Petajisto (2013), 1 based on US equity mutual funds. The research concludes that funds which differ from their corresponding benchmark as measured by active share above a certain threshold are well-positioned to outperform their benchmarks before and after fees. In other words, without closet indexers active management s aggregate results may improve. 1 Original working papers circulated in 2006 and 2010 (How Active Is Your Fund Manager? A New Measure That Predicts Performance; and Active Share and Mutual Fund Performance) respectively. Opinions are as of March 2015 and are subject to change. 2 Lazard Asset Management

4 Active Share Definition Measured in percent, active share represents the portion of portfolio holdings that differ from its benchmark holdings (think of it as assets deployed differently than in the index ). It is calculated as half the sum of the absolute active weights of all securities in a portfolio. It ranges from 0% for an index-tracking fund to 100% for a portfolio with no overlap with its benchmark. The higher the number, the more "active" the manager is. A portfolio with active share between 20% and 60% is considered to be a closet indexer. 1 Active Share = w f 2 - w i Where: wf = Weight of the security in the portfolio wi = Weight of the security in the index 1 Cremers and Petajisto (2009) This information is for illustrative purposes only. 3 Lazard Asset Management

5 How to Calculate Active Share Active Share in a Hypothetical Portfolio Security Portfolio Weight (%) Index Weight (%) Active Weight (%) ABS Active Weight (%) Overweight (%) A B C D E F Sum: Active Share (%): This information is for illustrative purposes only and is not intended to represent any product or strategy managed by Lazard. 4 Lazard Asset Management

6 A Two-Dimensional Approach for Measuring Active Management Traditional measurement, tracking error (TE), measures volatility of excess returns Dimension 1: TE can be used as a proxy for factor bets New measurement, active share (AS), % portfolio different from the benchmark Dimension 2: AS can be used as a proxy for stock selection Active/Passive Management Categories Active Share High Low Diversified Stock Picks Closet Indexing Concentrated Stock Picks Factor Bets 0 Pure Indexing Low Tracking Error High This information is for illustrative purposes only. Source: Cremers and Petajisto (2009) 5 Lazard Asset Management

7 Active Share and Performance US Equity Mutual Funds Findings from Petajisto s study (2013) of US equity mutual funds: The highest active share quintile corresponds to the highest average outperformance result The Stock Pickers group s excess return was positive 126 bps after fees Those with active share below 60% fall into the lowest quintile US Equity Mutual Fund Performance and Characteristics, Gross Excess Return (%) Net Excess Return (%) Average Active Share (%) Average Tracking Error (%) Average Number of Stocks Stock Pickers Concentrated Factor Bets Moderately Active Closet Indexers The performance quoted represents past performance. Past performance is not a reliable indicator of future results. This information is for illustrative purposes only and does not represent any product or strategy managed by Lazard. Source: Petajisto (2013) 6 Lazard Asset Management

8 Active Share and Performance Global and International Equity Mutual Funds Findings from the study of global and international equity funds: The highest active share quintile corresponds to the highest average outperformance result Those with active share below 70% fall into the lowest quintile Active share thresholds are guidelines only, not strict pass/fail tests More empirical tests are needed to assess other asset classes or investment universes (e.g., emerging markets) Active Share, Fees, and Performance for Global and International Equity Funds Active Share Quintile Average Active Share (%) Gross Excess Return (%) Net Excess Return (%) High Low Fund performance for the period 2007 to 2011 The performance quoted represents past performance. Past performance is not a reliable indicator of future results. This information is for illustrative purposes only and does not represent any product or strategy managed by Lazard. Source: Lazard, Taking a Closer Look at Active Share by Khusainova and Mier, Lazard Asset Management

9 Closet Indexing Trends Active Share Over Time, US Equity Mutual Funds Fraction of Mutual Fund Assets by AS range (%) (%) Active Share Ranges: VIX (calendar year average) [RHS] Source: Petajisto (2013) 8 Lazard Asset Management

10 Limitations of Active Share Benchmark Structure A Portfolio s Active Share Is Impacted by the Structure of its Benchmark Index The following practices will artificially increase active share as a result of fewer overlapping holdings: Using inappropriate benchmark When compared to peers, verify what index they used to calculate their active share Using an index that is too broad/ constituent-heavy The ranges defining closet indexers should be re-evaluated upwards Mismatch of multiple security types representing a single company Need to convert to the parent company identifier to avoid artificial bets The following practices will artificially decrease active share: Small investment universe Usage of constituent-light index The ranges defining "closet indexers" should be re-evaluated downwards Opinions are as of March 2015 and are subject to change. 9 Lazard Asset Management

11 Limitations of Active Share Benchmark Concentration Benchmark Concentration Will Influence the Size of Active Share Benchmark Weight in Largest 20 Holdings (%) Number of Constituents FTSE NAREIT All Equity REITs Index MSCI EM Latin America Index S&P 500 Index MSCI Emerging Markets Index MSCI EAFE Index MSCI ACWI ,470 MSCI Emerging Markets Small Cap Index 5.4 1,803 Russell 2500 Index 4.9 2,541 Benchmark Concentration in Top 20 Holdings (Y) versus Active Share (X), US Mutual Funds 1 (%) Russell 1000 Index S&P 500 Index 21 Russell 3000 Index 14 S&P Midcap 400 Index 7 Russell Midcap Index Russell 2000 Index (%) 1 As of September 2009, Source: Petajisto (2013), Data show funds average active share by benchmark (total 289 funds). As of 31 December 2014 Sources: MSCI, S&P, Russell, FTSE via FactSet 10 Lazard Asset Management

12 Limitations of Active Share Portfolio Construction Portfolio composition/construction will influence the size of active share Overweighting the larger cap spectrum will most likely produce lower active share relative to the portfolio which gravitates toward overweighting midcap spectrum using the same benchmark Example of two hypothetical portfolios benchmarked against Russell 1000 Value: Portfolio B is better positioned for higher active share relative to portfolio A Portfolio A Portfolio B Russell 1000 Value Index Market Capitalization ($B) Weight (%) Number of Securities Weight (%) Number of Securities Weight (%) Number of Securities > to to to Total As of 31 December 2014 For illustrative purposes only. Allocations are subject to change. The data in the chart above is not meant to represent any product or strategy managed by Lazard. 11 Lazard Asset Management

13 Minimizing Mismatch of Security Types FactSet s Parent Issuer Converter In Portfolio Analysis go to Options/Groupings 1. In Available Groupings under FactSet category/other select Security Name 2. Set Grouping Definition hyperlink to FactSet Immediate Issuer Opinions are as of March 2015 and are subject to change. 12 Lazard Asset Management

14 Minimizing Mismatch of Security Types FactSet s Parent Issuer Converter Result Securities were converted to their immediate issuers: depositary receipts, preferred shares, and various share classes are all rolled up into the parent company. Artificial bets are minimized: No conversion active bet is 97 bps [(135+59)/2] Post conversion active bet is 38 bps [76/2] Example Opinions are as of March 2015 and are subject to change. 13 Lazard Asset Management

15 Conclusions Active Share is an important addition to the toolkit for evaluating actively managed portfolios To avoid erroneous interpretation of results carefully consider Appropriateness of the benchmark The benchmark structure (ex., concentration, number of constituents) The investment universe The portfolio construction process Active share thresholds are guidelines only, not strict pass/fail tests Closet indexing threshold may need to be re-adjusted upwards or downwards Opinions are as of March 2015 and are subject to change. 14 Lazard Asset Management

16 Biographies Erianna Khusainova, CFA Senior Vice President, Portfolio Analyst Lazard Asset Management LLC (New York) Erianna Khusainova is a Senior Vice President and Portfolio Analyst on the Lazard Multi Asset team, focusing on investment strategy and macroeconomic research. Since joining Lazard, Erianna built and led the global Marketing Data group, which serves as a centralized resource for quantitative portfolio and market analytics to support the firm's global marketing and sales efforts. She began working in the investment field in Prior to joining Lazard in 2006, Erianna was a Senior Staff Accountant at The King's College, responsible for accounting and financial analysis. Erianna has a MBA in Finance from the Baruch College, Zicklin School of Business and a BBA in Finance from Tashkent Polytechnical University in Uzbekistan. She is a member of the NYSSA and the CFA Institute and is a native speaker of Russian. 15 Lazard Asset Management

17 Disclosures This presentation and all research and materials enclosed are property of Lazard Asset Management LLC 2015 Lazard Asset Management LLC. Information and opinions presented have been obtained or derived from sources believed by Lazard to be reliable. Lazard makes no representation as to their accuracy or completeness. This presentation is for informational purposes only. It is not intended to, and does not constitute, an offer to enter into any contract or investment agreement in respect of any product offered by Lazard Asset Management and shall not be considered as an offer or solicitation with respect to any product, security or service in any jurisdiction or in any circumstances in which such offer or solicitation is unlawful or unauthorized or otherwise restricted or prohibited. All opinions expressed herein are as of the date of this presentation and are subject to change. Equity securities will fluctuate in price; the value of your investment will thus fluctuate, and this may result in a loss. Securities in certain non-domestic countries may be less liquid, more volatile, and less subject to governmental supervision than in one s home market. The values of these securities may be affected by changes in currency rates, application of a country s specific tax laws, changes in government administration, and economic and monetary policy. The securities and/or information referenced should not be considered a recommendation or solicitation to purchase or sell these securities. It should not be assumed that any of the referenced securities were or will prove to be profitable, or that the investment decisions we make in the future will be profitable or equal to the investment performance of securities referenced herein. Certain information included herein is derived by Lazard in part from an MSCI index or indices (the Index Data ). However, MSCI has not reviewed this product or report, and does not endorse or express any opinion regarding this product or report or any analysis or other information contained herein or the author or source of any such information or analysis. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any Index Data or data derived therefrom. This material is for informational purposes only. It is not intended to, and does not constitute financial advice, fund management services, an offer of financial products or to enter into any contract or investment agreement in respect of any product offered by Lazard Asset Management and shall not be considered as an offer or solicitation with respect to any product, security, or service in any jurisdiction or in any circumstances in which such offer or solicitation is unlawful or unauthorized or otherwise restricted or prohibited. Australia: FOR WHOLESALE INVESTORS ONLY. Issued by Lazard Asset Management Pacific Co., ABN , AFS License , Level 39 Gateway, 1 Macquarie Place, Sydney NSW Dubai: Issued and approved by Lazard Gulf Limited, Gate Village 1, Level 2, Dubai International Financial Centre, PO Box , Dubai, United Arab Emirates. Registered in Dubai International Financial Centre Authorised and regulated by the Dubai Financial Services Authority to deal with Professional Clients only. Germany: Issued by Lazard Asset Management (Deutschland) GmbH, Neue Mainzer Strasse 75, D Frankfurt am Main. Hong Kong: Issued by Lazard Asset Management (Hong Kong) Limited (AQZ743), Unit 30, Level 8, Two Exchange Square, 8 Connaught Place, Central, Hong Kong. Lazard Asset Management (Hong Kong) Limited is a corporation licensed by the Hong Kong Securities and Futures Commission to conduct Type 1 (dealing in securities) and Type 4 (advising on securities) regulated activities. This document is only for professional investors as defined under the Hong Kong Securities and Futures Ordinance (Cap. 571 of the Laws of Hong Kong) and its subsidiary legislation and may not be distributed or otherwise made available to any other person. Japan: Issued by Lazard Japan Asset Management K.K., ATT Annex 7th Floor, Akasaka, Minato-ku, Tokyo Korea: Issued by Lazard Korea Asset Management Co. Ltd., 10F Seoul Finance Center, 136 Sejong-daero, Jung-gu, Seoul, Singapore: Issued by Lazard Asset Management (Singapore) Pte. Ltd., 1 Raffles Place, #15-02 One Raffles Place Tower 1, Singapore Company Registration Number W. This document is for institutional investors or accredited investors as defined under the Securities and Futures Act, Chapter 289 of Singapore and may not be distributed to any other person. United Kingdom: FOR PROFESSIONAL INVESTORS ONLY. Issued by Lazard Asset Management Ltd., 50 Stratton Street, London W1J 8LL. Registered in England Number Authorised and regulated by the Financial Conduct Authority (FCA). United States: Issued by Lazard Asset Management LLC, 30 Rockefeller Plaza, New York, NY Lazard Asset Management