Portfolio construction matters
SUMMARY
INTRODUCTION
Investors want outperformance, but they dislike large tracking errors to benchmarks. Naturally, the former is difficult without the latter, which is one of the reasons why most mutual funds underperform. Fund managers understand that they need to be different to generate alpha, but their investors will redeem their capital if they underperform significantly. Given this career risk, many fund managers minimize the tracking error and therefore their ability to outperform after fees.