Active share and portfolio concentration - metrics not prescriptions

High active share is likely to magnify outperformance for skilled managers as well as underperformance for unskilled managers
Matthew Gadsden
JANA Partner & Head of Global Equities Research

Against a backdrop of narrow performance drivers for equity markets, alpha has been scarce. This has resulted in many investors giving up on active management (and shifting to passive) or looking to more concentrated ‘best ideas’ portfolios, reflecting larger deviations from benchmark positioning in order to amplify the impact of their winners.

For years, conventional analytics in isolation have been used to explain past performance.  However, while providing a good ‘snapshot’ of portfolio characteristics, these have offered little insight into skill and future performance.

A leading new study from JANA’s Head of Global Equities Research, Matthew Gadsden, and Cabot Investment Technology Founder, Michael A. Ervolini discusses the next generation of quantitative equity analysis – going beyond the industry standards of performance attribution and portfolio analysis to showcase skill and highlight how a shift to high conviction portfolio construction can drive both positive and negative performance impacts.

The study explores a range of important factors, including:

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Leveraging greater research and insights to drive client outcomes

Higher conviction portfolio construction has merit where the manager possesses a deep, fact-based understanding of their strengths and shortcomings and can use this knowledge to guide their decision making.

Through JANA and Cabot’s research partnership, JANA has examined metrics which identify buy and sell skill, position sizing skill, and investment process ‘sweet spots’ to strengthen its equity manager investment due diligence program. The use of Cabot’s exclusive research platform provides a quantitative edge to complement JANA’s extensive and propriety qualitative understanding of the investment manager universe.

In combination, this provides a new level of transparency that supports the managers’ self-awareness and facilitates improvement, along with supporting JANA’s conviction in recommending managers to our valued clients through the provision of useful quantitative metrics to highlight our qualitative insights.

 

Want to know more about how JANA can help you with your investment strategy?

To find out more on how JANA’s research and advice can support you, email your enquiry below and a member of the team will be in contact.

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About JANA & Cabot. 

JANA has collaborated with Cabot Investment Technology to enhance its investment due diligence process. JANA does not receive any commission or other financial payment from Cabot Investment Technology. JANA also utilises FactSet services to support its portfolio construction process.

Cabot, a FactSet Company, helps portfolio managers and research analysts improve. Using proprietary patented analytics, investment professionals are better able to understand skills, investment processes and behavioral tendencies. The results support clients both in better assessing the skills and investment processes of external managers and in helping internal management teams become more self-aware and turn this knowledge into stronger buying, selling and sizing decisions.

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JANA respectfully acknowledges the Traditional Custodians of the land where we work and live. We pay our respects to Elders past, present and emerging. We celebrate the stories, culture and traditions of Aboriginal and Torres Strait Islander Elders of all communities who also work and live on this land.