Divide and Conquer
Research Paper
November 7, 2024
Preview
Concentration has long been a challenge in certain markets, but even the broadest markets today are presenting similar difficulties for active managers. We analyze this investment problem from the perspective of both asset owners and active managers, to whom the capital is delegated.
We investigate how the assignment of an investable capped benchmark can expand the range of opportunities for active managers, and study how a portfolio's characteristics vary with, for example, the active risk budget allowed by the asset owner. In addition to this asset-manager view, we show how to combine a capped-benchmark-based active portfolio with a concentrated "completion portfolio" in such a way that the asset owner can retain the benefit of potentially better active-manager performance and outcomes.
Our simulation-based analysis indicates that in periods of high market concentration, both asset owners and asset managers could potentially benefit from considering a benchmark-splitting approach.
A simulated benchmark-splitting approach could improve asset managers' and asset owners' outcomes
The simulation implementation uses the adaptive-capping methodology with a maximum weight multiple of L = 1.25 for the MSCI USA Index.
Read the full paper
Read the full paper
Provide your information for instant access to our research papers.
Incorporating Sector Investing in Portfolio Management
Over the last 20 years, most U.S. sectors had low performance correlations, suggesting that sector rotation strategies had the potential to improve portfolio return or that combining less-correlated sectors had the potential to reduce portfolio risk over that period.
The content of this page is for informational purposes only and is intended for institutional professionals with the analytical resources and tools necessary to interpret any performance information. Nothing herein is intended to recommend any product, tool or service. For all references to laws, rules or regulations, please note that the information is provided “as is” and does not constitute legal advice or any binding interpretation. Any approach to comply with regulatory or policy initiatives should be discussed with your own legal counsel and/or the relevant competent authority, as needed.