Being active, but playing it safe, has worked extremely well for investors in global equities

Low active-risk strategies deliver what investors want in a core holding: broad exposure, lower fees and greater consistency in performance. More importantly, they have also outperformed their more active peers over the past decade.

It’s often assumed that risk and reward always go together in investing, but that isn’t always the case. In fact, over the past decade, global equity managers who have taken on some, but not high, levels of risk by varying from an index (that is, “active risk”) have outperformed by more than most of their higher risk counterparts. Not only have they done this on a risk-adjusted basis (i.e. how much return they generated per unit of risk) but even more impressively, they have also outperformed on a straight-up comparison of absolute performance.

Slow and steady can still win the race

We arrived at our conclusion by comparing global equity strategies’ gross performance based on their tracking error (a measure of how much a strategy varies from its benchmark index). As Figure 1 illustrates, those managers who took large active bets, assuming tracking errors of 5% or more, significantly underperformed their more cautious counterparts over the past 10 years, as well as the shorter periods of 3, 5 and 7 years. While the low and moderate tracking error managers performed similarly over 10 years, the more conservative active risk managers significantly outperformed over 3, 5 and 7 years. The gap would be even greater after fees are considered.

Click here to read more...