I thought this article from Morningstar.com was interesting. I will have to read the original studies:
Are Fidelity Managers Active Enough?
It’s tough to beat the market by emulating it, but that doesn’t stop money managers at Fidelity and elsewhere from trying. Over at least the past couple decades, fund portfolios have come to look increasingly like the benchmarks they aim to defeat. They know that may make it harder for their funds to stand out, but it also limits the risk of dramatic underperformance. The latter, even over short stretches of times, can cost managers their jobs, especially if shareholders head for the exits as a result.
What’s good for fund managers’ job security, though, isn’t necessarily good for investors. That’s one takeaway from a 2009 study by Yale academics Martijn Cremers and Antti Petajisto. The duo developed a simple metric called active share to describe how similar a fund’s holdings are to an index’s. (A fund with 60% overlap with an index would have 40% active share, for example.) Examining data between 1990 and 2002, the Yale professors found that funds with higher active share–that is, funds that take more risk versus the index–had better long-term returns. Morningstar director of fund research Russell Kinnel came to a similar conclusion focusing on data between 2004 and 2009.
I must correct Davis on one count: He conflates deviating from the benchmark with taking more risk when he says “funds with higher active share–that is, funds that take more risk versus the index…”
Value investors understand that when portfolio selections are researched properly and diligently, funds that deviate from broad benchmarks actually reduce risk. And, when fund managers reduce risk, contrary to academic theory, they outperform in the long run as stated above.
And, of course, all value investors are active managers. I will have to start searching harder for articles that refute my value philosophy. After all, I do not want to succumb to confirmation bias. The problem though, is that articles like the one above seem to constantly fall into my lap, and it is rare to stumble across any academic or professional research that says value investing does not work.
By Christopher Davis | 09-29-10 | 06:00 AM | E-mail Article
Value investing does work – the arguments as to it being riskier or less risky are at the end of the day most interesting to those of us in the industry. At the end of the day the clients care most that they get good long term returns.