it is precisely during times of unrest and when investors are
showing signs of
panic that active managers have the greatest edge.
– søren Milo christensen portfolio manager sKAGEn Global
Tumultuous times often lead to fear which causes share prices to
diverge from the fundamental values in companies. Histori- cally
speaking these periods have created good opportunities for active
managers with a long investment horizon, who have the freedom to
choose companies irrespec- tive of index, region or sector.
has long been debated whether it is best to invest in an index fund,
so-called passive management, or whether one should instead invest in
an active manager who seeks to create excess return.
the debate has been raging for many years, it remains remarkably unba- lanced
How active is active?
An important, but little used
measure that should be taken into account when selec- ting an active
manager is active share. simply put, active share demonstrates how
much of a fund is invested differently to the index.
share of 30 percent, for example, means that 30 percent of the fund
diverges from the index. in other words, 70 percent of the fund is
identical to its benchmark. Active share is a good way for fund
investors to assess whether they get what they pay for when it comes
to active management.
This can best be illustrated by an
example. let’s take a fund with an active share of 30 percent and a
fixed manage- ment fee of 2 percent. Then assume that the 30 percent
that is invested differently to the general market provides a very
respec- table excess return of 5 percentage points. The manager will
thereby have created an excess return for the entire fund of 1.50
percentage points (before fees). nevertheless, although the
manager has picked the right stocks, fund savers actually end up with
a relative return of minus 0.5 percentage points, after fees. With an
active share of 30 percent, and a fixed management fee of 2 percent,
the manager must create an excess return of almost 7 percentage points
in the active part of the portfolio just to cover the fixed
Closet indexers dominate
in reality, a fund
with low active share is invested almost identically to the general
market. As such, statistically speaking, it is impossible to beat the
market in the long run. These types of managers are known as closet
Moreover, history has shown that the proportion of
closet indexers – that is those with an active share of less than 60
percent – has been increasing.
in contrast, sKAGEn Kon-Tiki had
an active share of 96 percent at the end of 2013. Active share in
sKAGEn Global and sKAGEn Vekst was 95 percent and 94 per- cent
respectively at the same point in time. sKAGEn’s value-based
investment philo- sophy is viewed by many as one of the main reasons
behind its success. but perhaps just as important is the portfolio
managers’ freedom to pick companies in the portfolios themselves, far
from the world’s financial centres and groupthink mentality.
Faulty empirical data leads to faulty conclusion
poorer returns than the general market. The problem is that the
analyses contain data from a large range of suppo- sedly active
managers, which do not have a chance of beating the market.
very different picture emerges if one carries out a more nuanced
analysis of active managers. The fact is that truly active managers –
i.e. those with an active share of more than 60 percent – on average
beat the market after costs.
based on the table below, we can
draw three general conclusions:
1) Active managers beat the
general market – before costs.
2) Those with high active share
beat the market more than those with low active share. The reason for
this is not that those with low active share pick the wrong stocks,
but that a large part of the fund is invested identically to the
index, hence the combi- ned excess return is minimal.
Managers with low active share therefore do not create excess return
large enough to cover their fees.