Does more active management lead to higher outperformance?
SUMMARY
INTRODUCTION
Fund managers are paid to outperform, which means they must differ from their benchmarks. For years, many could stay close to benchmarks, hugging them closely, but the rise of ETFs and improved analytics has made that approach harder. To justify meaningful fees, managers now need to be truly active.
Greater activity, however, is a double-edged sword: it increases the potential for both strong outperformance and significant underperformance. The most common ways to measure this activity are active share and tracking error.
This article explores how these two metrics influence fund managers’ ability to outperform.