On Friday, I came across an interesting article called “Active fund managers are closet index huggers”* in the Financial Times and couldn't help but pass it along. We have been saying for years now that Cambridge is willing to look significantly different than the index in pursuit of superior risk-adjusted returns (and that is different than our peers and the benchmark). Our clients would certainly agree that they have benefitted from this approach.
This article delves into the idea of “active share” which is the percentage of a fund’s portfolio that differs from its benchmark. Although I am not advocating this as a tool in isolation, there is a good question that comes out of this idea that you may want to pose to your fund managers (or advisors): How much overlap does your fund have with the index?
The article’s conclusion is what I find the most interesting. We have been reiterating this message since day one at Cambridge: Smaller funds tend to outperform. Bigger fund groups tend to outperform. Lower fees always help. And finally, fund managers have a strong incentive to do better when they themselves are invested in the funds.
*You can register at ft.com to access the article (it’s free).