Recent research has revealed that on average, a fund manager's highest-conviction stock ideas consistently outperform the index, while lower-conviction positions don't, acting as a drag on returns (see figure 1). This poses a problem for investors in actively managed funds, as the number of stocks in the former category tends to be very low, and the number in the latter high.
Managers could strip their portfolios down to the handful of stocks in which they have the maximum conviction - but that could bring unacceptable concentration and volatility risk.
Can the problem be solved?
We believe a new approach that combines active and passive elements could have the answer.
Stephen Mortimer, Equity Portfolio Manager at Wellington Management, outlines the strategy in the article below.
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