We often hear about the benefits of using a high-conviction fund manager. But, as ROBIN POWELL explains in his latest article for Timeline, Morningstar has been looking into the extent that investors benefit from the big bets that active managers make, and the findings are not encouraging.
If you were asked to choose between a fund manager who had the courage of his or her convictions and invested heavily in a few specific stocks, or one who preferred to invest smaller amounts in a larger number of stocks, which would you choose?
Instinctively, most investors would probably opt for the former. Faced with seemingly complex problems like navigating the global financial markets, people are more inclined to trust someone with strong opinions on where the best opportunities lie.
But is it true that fund managers who like making big bets — or, as they generally prefer to put it, have “large active weights” or “high-conviction holdings” — produce better returns than managers who tend to spread their risk?
The research team at Morningstar recently studied this issue in depth and its findings are illuminating.
Methodology
The researchers analysed around 2,400 “big bets” across more than 670 U.S.-focused, actively managed funds from the start of 1997 to the end of June 2023.
They defined a big bet as any stock holding that averaged 5% of assets over its holding period and at some point accounted for 8% of portfolio assets and a 5% active bet against its category’s Morningstar Index.
To measure how effective these big bets were, they compiled the total position histories for each bet and benchmarked stock and fund performance to their Morningstar Indexes.
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