Active Management: Three Arguments for Stock Selection
Alpha is the return on an investment that is in excess of the expected return, given the investment’s level of risk. In a portfolio of securities, this excess return is attributed to the portfolio manager’s skill. This implies that it requires some form of active management, such as selecting securities (selection alpha) or timing a market, sector, or asset class correctly (timing alpha).
Active share is a measure of active portfolio management which represents the share of portfolio holdings that differ from the benchmark index holdings. It is intended to provide information about a fund’s potential for beating its benchmark index. Active share can be used together with tracking error (see below) for a more comprehensive picture of active management, allowing observers to distinguish between stock selection and factor timing.
Beta is the return that a portfolio earns that can be attributed to the market as a whole, as opposed to returns that are attributable to a portfolio manager’s skill (alpha).
Smart beta refers to alternative indexes that seek to outperform traditional cap-weighted indexes by weighting their holdings either equally or by fundamentals, such as sales or dividend yield.
Correlation is a statistical measure that indicates how closely two entities (e.g., securities, indexes, or portfolios) move in relation to each other. A correlation of 1.0 indicates that a move up or down by one is matched by a move in the same direction by the other. A correlation of -1.0 indicates that a move up or down will be matched by move in the opposite direction. A correlation of 0.0 indicates that the two entities have no statistical relationship.
Excess return shows how a product’s performance compares with that of its benchmark over a stated period of time.
Tracking error is the standard deviation of the difference between a fund return and its benchmark index return. It is a measure of is the volatility of a fund return’s in excess of its benchmark.
Risks to Consider: The value of investments in equity securities will fluctuate in response to general economic conditions and to changes in the prospects of particular companies and/or sectors in the economy. Mid and small cap company stocks tend to be more volatile and may be less liquid than large cap company stocks. Mid and small cap companies typically experience higher risk of failure than large cap companies. Small cap companies may also have more limited product lines, markets, or financial resources and typically experience a higher risk of failure than large companies. While growth stocks are subject to the daily ups and downs of the stock market, their long-term potential as well as their volatility can be substantial. Value investing involves the risk that the market may not recognize that securities are undervalued, and they may not appreciate as anticipated. No investing strategy can overcome all market volatility or guarantee future results.
Neither diversification nor asset allocation can guarantee a profit or protect against loss in declining markets.
Performance quoted represents past performance. Past performance is not a reliable indicator or a guarantee of future results. The historical data shown in the charts are for illustrative purposes only and do not represent any Lord Abbett mutual fund or any particular investment.
The opinions presented in this material are as of the date of publication, are subject to change based on subsequent developments, and may not reflect the views of the firm as a whole. The material is not intended to be relied upon as a forecast, research, or investment advice, is not a recommendation or offer to buy or sell any securities or to adopt any investment strategy, and is not intended to predict or depict the performance of any investment. Readers should not assume that investments in companies, securities, sectors, and/or markets described were or will be profitable. Investing involves risk, including possible loss of principal. This document is prepared based on the information Lord Abbett deems reliable; however, Lord Abbett does not guarantee the accuracy and completeness of the information. Investors should consult with a financial advisor prior to making an investment decision.