Despite an attractive pitch to asset owners, concentrated equity strategies may be letting investors down, according to Seth Weingram, senior vice-president and director of client advisory at Acadian Asset Management, speaking at the Canadian Investment Review’s 2023 Risk Management Conference.
“We’re thinking about a discretionary sort of stock-picking context, where you’ve got an individual manager who has limited time and attention to make forecasts,” he said, framing the premise behind concentrated strategies. “Therefore, that manager’s investment process or forecasting process really doesn’t scale very well. And that creates an inherent trade-off between breadth and skill.”
In that setting, he suggests a stock picker focuses their attention on a small set of stocks, even if doing so creates portfolios that have greater risk.
Referring to models built out of thousands of strategies in a 10-year period starting in 2013, Weingram noted these strategies were filtered to compare concentrated offerings against benchmarks selected by fund managers.
The models, which were within the universe of U.S. investments, were restricted to pure equity long-only strategies benchmarked to conventional broad market indexes, he said, noting the strategies ended up holing, on average, 23 stocks.
Weingram challenged the notion of whether a concentrated equity approach has delivered the results promised in the past. “It’s very difficult to look at [the data] and infer that there is any information here that suggests out-performance on the part of the concentrated managers.”
A second test of data that explicitly controlled for size and market risk exposure, as well as consistent value, size and characteristics, showed similar results: concentrated equity strategies failed to significantly overperform the benchmarks.
However, these results don’t represent a blanket statement because there are concentrated managers with what Weingram described as special skills who can deliver stellar results. “I think what [the result] does suggest is that, if you’re an asset owner, you shouldn’t look at concentrated approaches as simple as a straightforward means to improving risk-adjusted performance. It’s going to take some work. It’s at least going to take some work in terms of manager selection.”
Besides much greater risks, a concentrated investing approach puts a more difficult roadmap ahead of institutional investors, he noted. “I would advise asset owners that embrace concentration as a means to try and improve absolute performance to be very careful about unintended risk exposures in the portfolios to which they allocate and especially suboptimal trade-offs between exposures within and across the portfolios in which they invest.”
Instead of taking a concentrated approach, Weingram highlighted systematic extension strategies as a better way to amplify active exposure. The most direct systematic extension strategy, he said, is the 130/30 strategy that starts with a long-only active portfolio that extends long positions by 30 per cent using leverage manufactured from shorting 30 per cent of the capital. Asset managers can achieve a higher ratio of active exposure to market exposure if the beta target stays the same.
“What you are doing is you’re dramatically changing the active versus market exposures that you get out of the portfolio.”
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