Be Careful What You Wish For: High Active Share—Perception versus Reality
Alpha is a measure of risk-adjusted performance. It is the risk-adjusted excess return of a fund relative to the fund’s benchmark.
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.
Tracking error is commonly defined as the time-series standard deviation of the divergence between a fund return and its benchmark index return. A typical active manager aims for an expected return higher than the benchmark index, but at the same time wants to have low tracking error to minimize the risk of significantly underperforming the index.
Active Share is a methodology used to evaluate a fund’s actual performance and volatility against a benchmark. The methodology is not an indicator of how a specific investor’s investment will perform. This should not be used as a tool or evaluation in making any investment decision. We strongly recommend that you consult with your financial advisor before making an investment decision. Neither diversification nor asset allocation can guarantee a profit or protect against loss in declining markets.
The S&P 500® Index is widely regarded as the standard for measuring large cap U.S. stock market performance and includes a representative sample of leading companies in leading industries.
The Russell Midcap® Value Index measures the performance of those Russell Midcap companies with lower price-to-book ratios and lower forecasted growth values. The stocks are also members of the Russell 1000® Value Index. Index is unmanaged, does not reflect the deduction of fees or expenses; and is not available for direct investment.
The Russell 1000® Index measures the performance of the 1,000 largest companies in the Russell 3000 Index, which represents approximately 92% of the total market capitalization of the Russell 3000 Index.
The Russell 1000® Value Index measures the performance of those Russell 1000 companies with lower price-to-book ratios and lower forecasted growth values.
The Russell 1000® Growth Index measures the performance of those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values.
The Russell 2000® Value Index measures the performance of those Russell 2000 companies with lower price-to-book ratios and lower forecasted growth values.
The Russell 3000® Index measures the performance of the largest 3000 U.S. companies representing approximately 98% of the investable U.S. equity market.
Morningstar Mid-Cap Value Funds Average: Some mid-cap value portfolios focus on medium-size companies while others land here because they own a mix of small-, mid-, and large-cap stocks. All look for U.S. stocks that are less expensive or growing more slowly than the market. The U.S. mid-cap range for market capitalization typically falls between $1 billion and $8 billion and represents 20% of the total capitalization of the U.S. equity market. Value is defined based on low valuations (low price ratios and high dividend yields) and slow growth (low growth rates for earnings, sales, book value, and cash flow).
Indexes are unmanaged, do not reflect the deduction of fees or expenses, and are not available for direct investment.
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. Investing in international securities generally poses greater risk than investing in domestic securities, including greater price fluctuations and higher transaction costs. Special risks are inherent in international investing, including those related to currency fluctuations and foreign, political, and economic events. 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 may not appreciate as anticipated. No investing strategy can overcome all market volatility or guarantee future results.
The opinions in the preceding commentary are as of the date of publication and subject to change based on subsequent developments and may not reflect the views of the firm as a whole. This material is not intended to be relied upon as a forecast or research or investment advice regarding a particular investment or the markets in general, nor is it intended to predict or depict performance of any investment. This material is being provided as general information only and is not intended to be legal or tax advice. Investors should not assume that investments in the securities or sectors described were or will be profitable. This document is prepared based on information Lord Abbett deems reliable; however, Lord Abbett does not warrant the accuracy or completeness of the information. Investors should consult with a financial advisor before making an investment decision.