Specialist active management firms have been found to outperform those that have a greater mix of active and passive products, according to a new study.
The research from University of Technology Sydney (UTS) was based on a sample of more than 2,100 fund families internationally, using data from 1993 to 2015.
Dr Lorenzo Casavecchia of UTS Business School found that funds with a greater percentage of total assets under active management outperformed by 70 basis points a year on average, before fees.
Although the researchers chose to use source data from the US because of the greater detail available, Dr Casavecchia said the findings applied in Australia.
The study considered the excess return economically significant, saying it is risk adjusted.
“The question for us – and for investors – is whether specialisation has implications for investors’ wealth,” Dr Casavecchia said.
The study points to an association with manager skill for generating value for active specialisation, derived in part from the expertise that comes from focusing on one area, from a fund family’s infrastructure and its resources dedicated to private information production.
The paper co-authored with Macquarie University PhD candidate Georgina Ge noted: “Our study shows that fund families with greater asset-based focus on the active segment are more likely to possess better managerial skills at running their active funds.”
The findings also noted an experiment where researchers looked at what happened to funds that were sold, intact, out of more actively focused fund family into a less specialised one.
After the move, the funds would slip in performance and the converse also occurred.
Dr Casavecchia stated the study was not creating a battle between active or passive management, rather it was suggesting investors already in the active sector should be seeking focused active management specialists.
The dark side of specialisation, however, was shown to be greater exposure to losses in periods of market stress.
Investors should also diversify by using a range of actively focused specialists rather than sticking with just one brand, Dr Casavecchia added.
“The findings highlight the significant performance drag experienced by an average equity fund investor if the operational scope and investment philosophy of their fund family isn’t aligned with the primary objective of active funds – to outperform the index,” the paper said.
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