Error!

X

There was a problem contacting the server. Please try after sometime.

Sorry, we are unable to process your request.

Error!

X

We're sorry, but the Insights and Intelligence Tool is temporarily unavailable

If this problem persists, or if you need immediate assistance, please contact Customer Service at 1-888-522-2388.

Error!

X

We're sorry, but the Literature Center checkout function is temporarily unavailable.

If this problem persists, or if you need immediate assistance, please contact Customer Service at 1-888-522-2388.

Financial Professionals

Forgot password

Forgot Your LordAbbett.com password?

If you are a registered user, but have forgotten your LordAbbett.com password, please enter your email address.
Once your email address is verified, we will send you an email with instructions on how to reset your password.

EMAIL ADDRESS
e.g. joe@firm.com

Financial Professionals

Forgot Password

Thank you.

An email has been sent to with instructions on resetting your password.

Financial Professionals

Reset Password

NEW PASSWORD
Your password must be a minimum of characters.
CONFIRM NEW PASSWORD

Financial Professionals

Reset Password

Confirmation Message

Your LordAbbett.com password was successully updated. This page will be refreshed after 3 seconds.

OK

Financial Professional*

  • Gain access to exclusive LinkedIn Groups
  • Simplify your login
LOGIN WITH LinkedIn
LOGIN WITH LinkedIn

A verification Email Has Been Sent

Close

An email verification email has been sent to .
Follow the instructions to complete the email validation process.

I have not received my verification email

Check your SPAM mailbox and make sure that twelcome@lordabbett.com is allowed to send you mail.

I'm still having trouble

If you're still having trouble verifying your email address. feel free to contact us.

1-888-522-2388
clientservices@lordabbett.com


OK

We're sorry. We found no record of the email address you provided.

Close

Register For a LordAbbett.com Account
Using Your Email Address.

  • Registered Financial Advisors gain access to:
  • Our data mining tool, Insight & Intelligence
  • Best in-class practice management content
  • Educational events, videos and podcasts.
  • The Lord Abbett Review - Subscribe now!

Registered but Having Problems?

If you believe you are registered and are having problems verifying your email address, feel free to contact us.

1-888-522-2388 clientservices@lordabbett.com

Terms & Condition

X

These Terms of Use ("Terms of Use") are made between the undersigned user ("you") and Lord, Abbett & Co. ("we" or "us"). They become effective on the date that you electronically execute these Terms of Use ("Effective Date").

A. You are a successful financial consultant that markets securities, including the Lord Abbett Family of Funds;

B. We have developed the Lord Abbett Intelligence System (the "Intelligence System"), a state of the art information resource that we make available to a limited community of broker/dealers through the Internet at a secure Web site (the "LAIS Site"); and

C. We wish to provide access to the Intelligence System to you as an information tool responsive to the demands of your successful business pursuant to these Terms of Use. Accordingly, you and we, intending to be legally bound, hereby agree as follows:]

1. Overview. · Scope. These Terms of Use (which we may amend from time to time) govern your use of the Intelligence System. · Revisions; Changes. We may amend these Terms of Use at any time by posting amended Terms of Use ("Amended Terms of Use") on the LAIS Site. Any Amended Terms of Use will become effective immediately upon posting. Your use of the Intelligence System after any Amended Terms of Use become effective will be deemed to constitute your acceptance of those Amended Terms of Use.We may modify or discontinue the Intelligence System at any time, temporarily or permanently, with or without notice to you. Purpose of the Intelligence System. The Intelligence System is intended to be an information resource that you may use to contribute to your business research. The Intelligence System is for broker/dealer use only; it is not to be used with the public in oral, written or electronic form. The information on the Intelligence System and LAIS Site is for your information only and is neither the tax, legal or investment advice of Lord Abbett or its third-party sources nor their recommendation to purchase or sell any security.

2. Your Privileges. · Personal Use. Your use of the Intelligence System is a nontransferable privilege granted by us to you and that we may deny, suspend or revoke at any time, with or without cause or notice. · Access to and Use of the Intelligence System. The User ID and password (together, an "Access ID") issued by us to you (as subsequently changed by you from time to time) is for your exclusive access to and use of the Intelligence System. You will: (a) be responsible for the security and use of your Access ID, (b) not disclose your Access ID to anyone and (c) not permit anyone to use your Access ID. Any access or use of the Intelligence System through the use of your Access ID will be deemed to be your actions, for which you will be responsible. · Required Technology. You must provide, at your own cost and expense, the equipment and services necessary to access and use the Intelligence System. At any time, we may change the supporting technology and services necessary to use the Intelligence System. · Availability. We make no guarantee that you will be able to access the Intelligence System at any given time or that your access will be uninterrupted, error-free or free from unauthorized security breaches.

3. Rights in Data. Our use of information collected from you will be in accordance with our Privacy Policy posted on the LAIS Site. Our compliance with our Privacy Policy will survive any termination of these Terms of Use or of your use of the Intelligence System.

4. Your Conduct in the Use of the Intelligence System. You may access, search, view and store a personal copy of the information contained on the LAIS Site for your use as a broker/dealer. Any other use by you of the Intelligence System and the information contained on the LAIS Site these Terms of Use is strictly prohibited. Without limiting the preceding sentence, you will not: · Engage in or permit any reproduction, copying, translation, modification, adaptation, creation of derivative works from, distribution, transmission, transfer, republication, compilation or decompilation, reverse engineering, display, removal or deletion of the Intelligence System, any portion thereof, or any data, content or information provided by us or any of our third-party sources in any form, media or technology now existing or hereafter developed, that is not specifically authorized under these Terms of Use.

· Remove, obscure or alter any notice, disclaimer or other disclosure affixed to or contained within the Intelligence System, including any copyright notice, trademark and other proprietary rights notices and any legal notices regarding the data, content or information provided through the Intelligence System.

· Create a hyperlink to, frame or use framing techniques to enclose any information found anywhere on the LAIS Site without our express prior written consent.

· Impersonate any person, or falsely state or otherwise misrepresent his or her affiliation with any person in connection with any use of the Intelligence System.

· Breach or attempt to breach the security of the Intelligence System or any network, servers, data, or computers or other hardware relating to or used in connection with the Intelligence System; nor (b) use or distribute through the Intelligence System software or other tools or devices designed to interfere with or compromise the privacy, security or use of the Intelligence System by others or the operations or assets of any person.

· Violate any applicable law, including, without limitation, any state federal securities laws. 5. Your Representations and Warranties. You hereby represent and warrant to us, for our benefit, as of the time of these Terms of Use and for so long as you continue to use the Intelligence System, that (a) you are, and will continue to be, in compliance with these Terms of Use and any applicable laws and (b) you are authorized to provide to us the information we collect, as described in our Privacy Policy.

6. Disclaimer of Warranties.

· General Disclaimers.

THE INTELLIGENCE SYSTEM, THE LAIS SITE AND ALL DATA, INFORMATION AND CONTENT ON THE LAIS SITE ARE PROVIDED "AS IS" AND “AS AVAILABLE” AND WITHOUT ANY REPRESENTATIONS OR WARRANTIES OF ANY KIND. WITHOUT LIMITING THE PRECEDING SENTENCE, LORD ABBETT, ITS AFFILIATES, AGENTS, THIRD-PARTY SUPPLIERS AND LICENSORS, AND THEIR RESPECTIVE EMPLOYEES, CONTRACTORS, DIRECTORS, OFFICERS AND SHAREHOLDERS (COLLECTIVELY, THE “LORD ABBETT GROUP”) EXPRESSLY DISCLAIM ALL WARRANTIES, WHETHER EXPRESS, IMPLIED OR STATUTORY, INCLUDING THE WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, TITLE, AND NONINFRINGEMENT. YOU EXPRESSLY AGREE THAT YOUR USE OF THE LAIS SITE, THE INTELLIGENCE SYSTEM, AND THE DATA, INFORMATION AND CONTENT PRESENTED THERE ARE AT YOUR SOLE RISK AND THAT THE LORD ABBETT GROUP WILL NOT BE RESPONSIBLE FOR ANY (A) ERRORS OR INACCURACIES IN THE DATA, CONTENT AND INFORMATION ON THE LAIS SITE AND THE INTELLIGENCE SYSTEM OR (B) ANY TERMINATION, SUSPENSION, INTERRUPTION OF SERVICES, OR DELAYS IN THE OPERATION OF THE LAIS SITE OR THE INTELLIGENCE SYSTEM.

· Disclaimer Regarding Investment Research.

THE INTELLIGENCE SYSTEM INCORPORATES DATA, CONTENT AND INFORMATION FROM VARIOUS SOURCES THAT WE BELIEVE TO BE ACCURATE AND RELIABLE. HOWEVER, THE LORD ABBETT GROUP MAKES NO CLAIMS, REPRESENTATIONS OR WARRANTIES AS TO THE ACCURACY, TIMELINESS, COMPLETENESS OR TRUTHFULNESS OF SUCH DATA, CONTENT AND INFORMATION. YOU EXPRESSLY AGREE THAT YOU ARE RESPONSIBLE FOR INDEPENDENTLY VERIFYING YOUR INVESTMENT RESEARCH PRIOR TO FORMING YOUR INVESTMENT DECISIONS OR RENDERING INVESTMENT ADVICE. THE LORD ABBETT GROUP WILL NOT BE LIABLE FOR ANY INVESTMENT DECISION MADE BY YOU OR ANY OTHER PERSON BASED UPON THE DATA, CONTENT AND INFORMATION PROVIDED THROUGH THE INTELLIGENCE SYSTEM OR ON THE LAIS SITE.

· Survival.

THIS SECTION 6 SHALL SURVIVE ANY TERMINATION OF THESE TERMS OF USE OR YOUR USE OF THE INTELLIGENCE SYSTEM..

7. Limitations on Liability.

NONE OF THE MEMBERS OF THE LORD ABBETT GROUP WILL BE LIABLE TO YOU OR ANY OTHER PERSON FOR ANY DIRECT, INDIRECT, INCIDENTAL, CONSEQUENTIAL, PUNITIVE, SPECIAL OR EXEMPLARY DAMAGES (INCLUDING LOSS OF PROFITS, LOSS OF USE, TRANSACTION LOSSES, OPPORTUNITY COSTS, LOSS OF DATA, OR INTERRUPTION OF BUSINESS) RESULTING FROM, ARISING OUT OF OR IN ANY WAY RELATING TO THE INTELLIGENCE SYSTEM, THE LAIS SITE OR YOUR USE THEREOF, EVEN IF THE LORD ABBETT GROUP HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. THIS SECTION 7 WILL SURVIVE ANY TERMINATION OF THESE TERMS OF USE OR YOUR USE OF THE INTELLIGENCE SYSTEM.

8. Miscellaneous Provisions.

· Governing Law. This Agreement will governed by and construed in accordance with the laws of the State of New York, without giving effect to applicable conflicts of law principles.

THE UNIFORM COMPUTER INFORMATION TRANSACTIONS ACT OR ANY VERSION THEREOF, ADOPTED BY ANY STATE, IN ANY FORM ("UCITA") WILL NOT APPLY TO THESE TERMS OF USE. TO THE EXTENT THAT UCITA IS APPLICABLE, THE PARTIES HEREBY AGREE TO OPT OUT OF THE APPLICABILITY OF UCITA PURSUANT TO THE OPT-OUT PROVISION(S) CONTAINED THEREIN.

The Intelligence System is not intended to be used by consumers, nor are the consumer protection laws of any jurisdiction intended to apply to the Intelligence System. You agree to initiate and maintain any action, suit or proceeding relating to these Terms of Use or arising out of the use of the Intelligence System exclusively in the courts, state and federal, located in or having jurisdiction over New York County, New York.

YOU HEREBY CONSENT TO THE PERSONAL JURISDICTION AND VENUE OF THE COURTS, STATE AND FEDERAL, LOCATED IN OR HAVING JURISDICTION OVER NEW YORK COUNTY, NEW YORK. YOU AGREE THAT YOU WILL NOT OBJECT TO A PROCEEDING BROUGHT IN YOUR LOCAL JURISDICTION TO ENFORCE AN ORDER OR JUDGMENT OBTAINED IN NEW YORK.

· Relationship of Parties. The parties to these Terms of Use are independent contractors and nothing in these Terms of Use will be construed as creating an employment relationship, joint venture, partnership, agency or fiduciary relationship between the parties.

· Notice. All notices provided under these Terms of Use will be in writing and will be deemed effective: (a) when delivered personally, (b) when received by electronic delivery, (c) one business day after deposit with a commercial overnight carrier specifying next day delivery, with written verification of receipt, or (d) three business days after having been sent by registered or certified mail, return receipt requested. We will only accept notices from you in English and by conventional mail addressed to: General Counsel Lord, Abbett & Co. 90 Hudson Street Jersey City, N.J. 07302-3973 We may give you notice by conventional mail or electronic mail addressed to the last mail or electronic mail address transmitted by you to us.

· Third-Party Beneficiaries. The members of the Lord Abbett Group are third-party beneficiaries of the rights and benefits provided to us under these Terms of Use. You understand and agree that any right or benefit available to us or any member of the Lord Abbett Group hereunder will also be deemed to accrue to the benefit of, and may be exercised directly by, any member of the Lord Abbett Group to the extent applicable.

· Survival. This Section 8 will survive any termination of these Terms of Use or your use of the Intelligence System. The undersigned hereby signs these Terms of Use. By electronically signing and clicking "Accept" below, these Terms of Use will be legally binding on me. To sign these Terms of Use, confirm your full name and enter your User ID and Password (as your electronic signature) in the fields indicated below and click the “I Accept” button.

 

Equity Perspectives

High Active Share leads to underperformance, if combined with high tracking error.

Thanks to the concept of Active Share, investors now pay more attention to whether their actively managed funds are truly active. They’re also more informed about the basic types of active management. Unfortunately, the Active Share research is now being used to tout strategies that it does not support.

In recent years, for example, the notion has taken hold that concentrated funds are more likely to beat their benchmarks because they typically exhibit both high Active Share and high tracking error. But the Active Share results flatly contradict this idea. A correct reading of those results should caution those who would use concentrated funds to boost their returns. Addressing this topic is Walter Prahl, Lord Abbett Partner & Director of Quantitative Research.

Big Bets and Long Bombs
Some investors have achieved notable success by taking a concentrated approach. And John Maynard Keynes, a successful investor in his own right, spoke for them when he said: “It is a mistake to think one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.”1

Some academic research also appears to support concentrated portfolios. A 2010 study, for example, showed that fund managers’ top five “high-conviction” holdings outperformed the other stocks in their portfolios, leading the authors to conclude that the stock market is not efficiently priced and that “investors would benefit if managers held more concentrated portfolios.”2

But advocates of concentrated funds sometimes have drawn the wrong conclusions from findings like this, according to Prahl. “They’ve argued for concentration by observing that managers have their best performance with their biggest positions. But the logic is lopsided—it’s like finding that a quarterback had the best yardage gain when he threw the long bomb and, therefore, concluding that he should attempt the long bomb on every play.”

The “bomb” works in a particular situation recognized by the quarterback. It won’t work if it’s tried on every play, said Prahl. Likewise, the inference often made is that if the best performance comes from the biggest and highest-conviction positions, then portfolios should only have big, high-conviction positions. “All I’m saying is that’s a wildly invalid inference. Conviction isn’t pixie dust that you can sprinkle on positions by making them bigger.”

Stock Picking versus Factor Timing
The findings of the Active Share research have been oversimplified in recent years to “High Active Share Good, Low Active Share Bad.” Some investors, citing the 2009 study by professors Martijn Cremers and Antti Petajisto, have even argued that high Active Share, if combined with high tracking error, is even better than high Active Share alone.3 But this is not supported by the definitive 2013 Petajisto study.4 (See “Why Stock Picking Keeps on Ticking.”)

In the 2009 research, Cremers and Petajisto proposed two measures—Active Share and tracking error—as indicators of two different dimensions of active management. These two dimensions correspond with two primary categories of risk: idiosyncratic and factor-based.

Idiosyncratic risk refers to risks that are specific to a particular stock. Factor risk, on the other hand, is broader. It encompasses risks that arise from exposure to factors that affect large swathes of the stock market. A company’s industry or sector, for example, is a factor risk, because even a stock with strong fundamentals may underperform the market if it is hit by a sector-related shock, for example. Other common factor risks are “style” (growth versus value) and market capitalization.

By focusing on styles, sectors, capitalization, and other factors that are believed to be responsible for returns, factor timing places less emphasis on a stock’s fundamentals such as sales, growth prospects, and earnings. So, for example, if a portfolio manager believes small cap stocks will outperform, then he or she will overweight small caps stocks relative to the benchmark, without much regard for a stock’s particular fundamentals. Or, if the banking sector is expected to do well, then banking stocks as a whole will be overweighted.

 

Table 1. Two Dimensions of Active Management Tap Different Risk Categories and Are Measured Differently

Source: Lord Abbett.

One important question for Cremers and Petajisto was how to measure these two dimensions. To measure idiosyncratic risk, they decided to go at it directly by examining a fund’s holdings. To measure factor risk, they took an indirect route, assessing its effects on a fund’s returns.

Factor timing could have been measured via a holdings-based approach by comparing a portfolio’s weightings on various factors (e.g., sectors, capitalization, style, etc.)  But using tracking error instead has an advantage. It “allows us to measure factor timing without assuming anything about how fund managers define factor portfolios [sectors, capitalization, style, etc.] at each point in time, whereas a holdings-based approach would require such assumptions,” Cremers and Petajisto wrote.5

Neither measure is perfect, however. “Active Share ignores correlation between individual stock returns and simply sums up arithmetic differences between stock weights and benchmark weights,” said Prahl. “That’s both its virtue and its vice. It’s a limitation in that it gives only an approximate measure of actual active risk versus the benchmark.” That is, when a portfolio overweights stocks that are highly correlated, Active Share will understate that risk.

Tracking error, on the other hand, reflects the effects of these high correlations on returns and, therefore, provides a better measure of overall risk, according to Prahl. It will, however, “understate how active a portfolio is if the portfolio’s factor risks are carefully hedged in the interests of allowing more stock-specific risk taking,” he said.

With the two dimensions defined and measured, Cremers and Petajisto could then examine the effect of each on performance. And in the original 2009 paper, they found that high Active Share funds performed well, whether diversified or concentrated. They noted, however, that with concentrated portfolios, the benefits of Active Share compete with the detractions of tracking error, said Prahl. That is, beyond a certain point, it’s difficult to add Active Share without adding tracking error in even larger amounts. Thus, the improved performance that could arise from the added Active Share may be offset by the negative impact of added factor risk.  

The 2013 Petajisto update provided critical clarification. The period studied was extended through the financial crisis of 2008–09, and the results showed that, unlike in the original 2009 study, factor timing produced a negative effect on performance. As Table 2 shows, factor-timing funds failed to beat their benchmarks, as did high Active Share funds that were concentrated (as indicated by their high tracking error). So, not all high Active Share funds outperformed but only those that were diversified (as indicated by their low tracking error).

 

Table 2.  On Average, Only Diversified Stock Pickers Have Beaten Their Benchmarks
Average Active Share and tracking error, 1990–2009

Source: Antti Petajisto, “Active Share and Mutual Fund Performance,” Financial Analysts Journal (July/August 2013).
For illustrative purposes only and does not represent any Lord Abbett mutual fund or any particular investment.

 

“Overall, we can say that the first study was somewhat ambiguous on the implications for concentrated portfolios, with conclusions on that subject nuanced, while the second study had decidedly negative implications for concentration,” said Prahl.

The Difficulty of Factor Timing
Why did concentrated funds fail to match the performance of diversified stock pickers? As Chart 1 illustrates, concentrated funds represent a hybrid of the two dimensions: stock picking and factor timing. Concentrated funds take on some stock-specific risk while also adding factor exposures. In the course of selecting attractive stocks, they may deliberately seek to overweight or underweight risk factors. They may deliberately overweight financial stocks, small caps, or growth stocks, for example. Or they may allow weightings such as these to occur as an unintended effect of their stock selections.

 

Chart 1. Concentrated Funds Carry More Factor Risk than Diversified Stock Pickers
Source: Lord Abbett.

 

Sometimes the performance of these risk factors can benefit a portfolio’s overall return, and the practice of timing sectors, industries, and other factors has a long history in the asset management business. But the Active Share research suggests that factor-timing strategies that deliberately take factor risk are difficult to execute successfully. “The conclusion,” said Prahl, “is simply that factor timing is harder to do, and the average manager isn’t good at it.”

Concentrated funds may perform well for a long period, but that may depend on the period. The 2009 study, which covered the years from 1990–2003, showed that concentrated strategies performed as well as diversified stock pickers. But the 2013 study, which extended the original period to include the financial crisis of 2008–09, showed that concentrated funds struggled during the crisis, while the diversified approach continued to outperform. “The ostensible advantages of the concentrated approach seem rather fragile and period-specific,” Prahl said, “while the advantages of diversified stock picking have proven quite durable.”

Whether factor exposures are deliberate or not, the hazard of holding a concentrated portfolio is that it inevitably leaves the investor open to factor risks, according to Prahl. Portfolios with only 20 holdings, for example, can’t hedge out much of the risk associated with certain sectors, industries, styles, and other factors. Hedging out industry risk alone would probably require about 50 stocks.

The problem becomes worse the more concentrated the fund becomes. Reducing a fund’s holdings can be beneficial since it adds to its Active Share, but past a certain point the fund starts to add factor risk faster than it adds Active Share, said Prahl. “That point will easily be reached by about 50 names, which is well above what most concentrated fans regard as the right target. A portfolio of about 20 names will inevitably have a lot of factor risk—it won’t be a [diversified] stock picking portfolio but, in effect, a factor timing portfolio.”

Hedging or Doubling Down?
Can an investor hedge this factor risk by holding two or three concentrated funds? If a diversified stock-picking portfolio consisting of 100 holdings, for example, carries less factor risk than a concentrated fund consisting of 30 holdings, can an investor offset factor risks by owning multiple concentrated portfolios?

Such a strategy may actually multiply an investor’s factor risk, according to Prahl. Two concentrated funds with a “go anywhere” mandate may very well wind up in the same place, exposed to the same factor risks. They may both choose to load up on financial stocks, for example, or they may both inadvertently overweight small caps.

It’s possible in hindsight to assess a concentrated fund’s factor risks, but prospectively managing the factor risks inherent in multiple concentrated portfolios is not feasible. Because of this inevitable exposure to factor risks, “concentrated portfolios do not make good portfolio building blocks,” said Prahl.  

Active Share and Tracking Error: Finding the Right Ratio
Petajisto’s 2013 research showed that only the funds in the top quintile on Active Share beat their benchmarks, and only if they weren’t also in the top quintile on tracking error. But it’s not necessary to be in the top quintile on Active Share to receive the benefits of it.

What’s important is the relationship between Active Share and tracking error. “The real point of the research isn’t that you want Active Share as high as you can possibly get it, but rather that you want it high relative to tracking error,” said Prahl. What’s the right ratio? That depends on the investor’s tolerance for tracking error. What the portfolio manager should seek is to maximize Active Share for a given level of tracking error.

This is the whole point of the Active Share research, said Prahl. “More Active Share isn’t necessarily better if it comes with much more tracking error. Why is that? Because Active Share is a pretty good measure of stock picking, while tracking error tends to be more related to factor exposure. And the research shows that stock picking has worked, on average, while factor timing has been much more difficult.” 

                                                                                                     --Reported by Ron Vlieger

 

1 Nupur Pavan Ban and Khemchand Sakaldeepi, “Concentration: The Case for Putting All Your Eggs in One Basket,” ft.com, September 29, 2013.
2 Randy Cohen, Christopher Polk, and Bernhard Silli, “Best Ideas,” ssrn.com, March 15, 2010.
3 K.J. Martijn Cremers and Antti Petajisto, “How Active Is Your Fund Manager? A New Measure That Predicts Performance,” The Review of Financial Studies (Oxford University Press), 2009.
4 Antti Petajisto, “Active Share and Mutual Fund Performance,” Financial Analysts Journal, July/August 2013.
Cremers and Pejajisto, op cit.

 

RELATED TOPICS

FEATURED STRATEGIST

RELATED FUND
The Fund seeks to deliver total return by investing primarily in stocks of large U.S. companies.
RELATED FUND
The Fund seeks to deliver total return by investing primarily in stocks of mid-sized U.S. companies.
RELATED FUND
The Fund seeks to deliver total return by investing primarily in stocks of large U.S. companies that have a history of increasing their dividends.

Lord Abbett's Blog

 

videoOur blog, The Investment Conversation, features timely commentary and analysis from Lord Abbett experts. Join the conversation.

RELATED CONTENT