Is active management’s decade‐long losing streak to passive management due to high fees, a lack of manager skill, or something else? What’s required to answer this question is not rampant speculation but a fact‐based assessment of manager decision making, and the facts need to come from analysis of daily stock holdings of mutual funds. As the saying goes, “You cannot manage what you cannot measure.”
In a first‐of‐its‐kind study, our research explored how active managers generate stock selection alpha. We conducted a multi‐year analysis that covered 114 US equity mutual funds from 57 fund families and evaluated more than 400,000 individual rolling one‐year performance periods. Combined, our sample represented about $2 trillion in assets under management (AUM).
Our key focus? Manager conviction. How committed is the manager to the different sub‐groupings of equities within each fund? To find out, we measured the scale of overweight and underweight positions rather than the raw size of the holdings, which tends to be biased by the benchmark weightings.