How to improve the predictability of equity returns
By Guy Fletcher: Head of Institutional Solutions and Research, Sanlam Investments
Delivering persistent returns above your chosen benchmark doesn’t have to be a function of trying to pick and blend the best active equity managers, says Guy Fletcher, Head of institutional Solutions & Research at Sanlam Investments.
In his attached research paper, Fletcher demonstrates that including systematic strategies such as portable alpha and smart beta can both extract the benefits of diversification while still complementing the process of selecting traditional active managers.
However, selecting consistently outperforming traditional active managers is not only difficult, but individual manager persistence is rare. Indeed, longer term outperforming active managers tend only to be in the top 25% of all managers less than half the time, on a rolling 3-year basis. The desire for excess performance can thus can lead to inappropriate manager rotation, thereby impacting cumulative returns.
Fletcher concludes that to bring greater levels of predictability to equity portfolio returns, you would need to challenge the traditional preference for merely blending active managers. Instead, his research reveals that the solution would be to include a portable alpha element (that brings stability) combined with a smart beta strategy (to yield maximum diversification) in conjunction with traditional manager selection.
Structuring portfolios to take advantage of these independent processes is far more likely to improve the consistency of returns.
Download Guy Fletcher’s full, printable white paper below.
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