Northill – London – Northill Capital (Northill) today released the report ‘Nowhere to hide: Focused active asset managers outperform’, analysing the structure of active asset management firms[1] and the effects of those business models on delivering outcomes to investors. The research demonstrates that active asset managers focused on a single core skillset have significantly outperformed both generalist active asset managers and passive mandates across multiple asset classes over the past five years.

 

Key findings:

Focused active managers outperformed generalist managers

• Comparing the average five year outperformance of 2,004 active US equity strategies, the largest sample in the study with a combined AUM of $3.9 trillion, the most focused managers (ranked in the top decile) generated average annualised gross outperformance of 116 basis points (bps) per annum relative to their benchmarks while the average manager delivered only 2 bps per annum.
• The most focused mid-sized[2] active US equities managers generated average annualised outperformance of 146 bps per annum, 145 bps more than the average mid-sized manager.

 

Evidence that focused active managers tend to outperform holds true in each of the additional asset classes analysed over the same period. The average five year annualised outperformance premium achieved by the most focused mid-sized managers over the average mid-sized manager was 94 bps per annum in European equities; 60 bps per annum in US fixed income; 29 bps per annum in global equities and 57 bps per annum in emerging market equities.

 

The average focused active manager outperformed passive mandates after fees

• Active US equity strategies offered by the most focused mid-sized managers generated 68 bps per annum average outperformance net of fees, while the average active US equity strategy underperformed passive mandates by an average -18 bps per annum after fees.

The Report analysed the performance of over 5,000 active long only equity and fixed income strategies, with a total AUM of $14.2 trillion, over the five year period 2011-2015. Active asset managers offering a single investment strategy ranked within the top decile for focus[3]. The business models of focused managers typically exhibit key indicators that strengthen the alignment of interests with their clients, which is a key driver of outperformance:

• 100% of management time and resource committed to making a single, repeatable investment process as successful as possible.
• All investment professionals work in a single team, which is the largest function of the firm.
• Where distinct investment products tailored to client segments or investment universe constraints exist, they share a single research platform, and are therefore in general all successful or unsuccessful at the same time.

Jon Little, Partner, Northill Capital LLP, said, “This report provides evidence of a persistent link between asset managers focused on one asset class and their success in delivering outperformance to investors.”

 

“Asset class and investment style specialists significantly outperformed both benchmarks and passive strategies on an after fees basis. Our findings show that focus tends to drive outperformance in multiple asset class disciplines; on average, focused active managers outperformed generalist active managers by an average 77 basis points per annum,” said Ryan Sinnott, Director, Strategy and Development, Northill Capital LLP.

 

“Allocating to a focused active manager that is more directly aligned with the performance of its investment strategy can also help asset owners differentiate between luck and skill. Generalist managers may incubate many track records in multiple asset classes, but report returns only for strategies surviving a culling process. For single-purpose managers, a sustained period of underperformance can put the entire business at risk. With a single investment strategy, focused managers have nowhere to hide.”

 

Jon Little added: “In truly focused active asset management firms all professionals work as one team to deliver the best possible investment results. The key decision makers also tend to hold a meaningful proportion of the firm’s equity. Their success and the long-term value of the firm are defined solely by the outcomes delivered for all clients.

 

“Focused firms do not risk their track record by growing assets beyond their true capacity, and do not attempt to diversify away from their core skillset to mitigate business risk. Diversification risks damaging outcomes for investors and does not play well with key investment talent. Firms offering multiple strategies become sidetracked by how to share the firm’s economics. These tensions destroy teamwork, damage firm culture and distract investment professionals.

 

“The clear alignment of interests between asset owner and asset manager maximises the probability that investors appointing focused managers will achieve long-term successful investment outcomes.”

 

[1] The Report analyses the live track record of 5,006 active long only equity and fixed income strategies, with total AUM of $14.2 trillion, reporting gross investment performance for the five year period to 31 December 2015. MercerInsight® database utilised for return data, manager and strategy AUM.

2 $50 million to $100 billion AUM.

3 See ‘Defining focus’ in Methodology.

4 See Methodology in Report at www.northill.com

Download the full report at www.northill.com/Perspectives

 

[1] The Report analyses the live track record of 5,006 active long only equity and fixed income strategies, with total AUM of $14.2 trillion, reporting gross investment performance for the five year period to 31 December 2015. MercerInsight® database utilised for return data, manager and strategy AUM.

[2] $50 million to $100 billion AUM.

[3] See ‘Defining focus’ in Methodology.