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Alpha Theory Blog - News and Insights

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1 posts from January 2020

January 3, 2020

The Active Manager Paradox High-Conviction Overweight Positions


A 2019 article written by Alexey Panchekha, CFA called The Active Manager Paradox: High-Conviction Overweight Positions analyzes the performance of a funds' highest conviction positions as measured by position size over the benchmark. Each position was measured net of benchmark weight and the top 80% of positions above the benchmark were bucketed into High Conviction Overweights. The opposite group was the Underweights and everything else was the Neutrals. The Overweights outperformed the benchmark by 2.8% over the past five years.



114 managers with 85bps fees from 2014 to 2019. The performance data presented represents rolling one-year data (daily step), which was evaluated to capture the percent of rolling periods where each sub-portfolio was able to outperform the corresponding benchmark (Success Rate), and the average excess (or negative) relative return.


The author explains the conclusions below:


According to our research, the average manager sabotaged their returns by shrinking the High-Conviction Overweight stocks to an overall portfolio weight of 55%. The corresponding portfolio allocation to Underweights and Neutral Weights thus acts as a “Beta Anchor” that severely dilutes the alpha generated by High-Conviction Overweight positions.


While it is industry convention to blame these outcomes on higher fees, our research suggests that fees are only a secondary contributor. Diluting the sole source of stock selection alpha to a minority component of a portfolio has far greater structural impact than higher fees.


Assuming overweight position sizing relative to a benchmark is indicative of conviction level, then this research is a compelling example of the talent inherent in active managers and the alpha that is destroyed by a lack of concentration.


This article is one of a long series of “Empirical Proofs” of active manager skill that we’ve been collecting. To see the full list, download a full version of the Concentration Manifesto.