Past performance is not a reliable indicator of future results.
Walter Prahl, Lord Abbett Partner and Director of Quantitative Research, sums it up this way: "What the active share research has revealed is that managers relying on factor timing are less likely, on average, to add value than managers who engage in stock picking." Prahl adds that “for those opting for passive portfolios, stock picking is a lot to give up."
Interested in learning more about active management? Visit lordabbett.com or download our Perspectives app for the iPad from the Apple App Store.
Research cited in this video:
K.J. Martijn Cremers and Antti Petajisto, "How Active Is Your Fund Manager? A New Measure That Predicts Performance," Yale Working Paper No. 06-14, March 31, 2009.
Antti Petajisto, "Active Share and Mutual Fund Performance," Social Science Research Network, January 15, 2013.
Active Share is a concept that entails comparing the holdings and weightings of a fund in order to provide a numerical measure indicating how much a fund diverges from its benchmark. That is, it provides one indicator of just how active an active manager is. An Active Share score can range from zero for a fund that matches its benchmark perfectly to 100 for one with no overlap whatsoever. Active Share can therefore be interpreted as the portion of a portfolio that differs from the benchmark. Active Share was developed by professors K.J. Martijn Cremers (formerly of Yale University) and Antti Petajisto (formerly of New York University).
Tracking error (or more formally, tracking error volatility) 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 (volatility) 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. Lord Abbett does not offer exchange-traded funds (ETFs) or index funds. An ETF is a security that tracks an index, a commodity, or a basket of assets like an index fund, but trades like a stock on an exchange. ETFs experience price changes throughout the day as they are bought and sold. ETF products, like all investments, are subject to market risk, which may result in loss of principal. Index funds are constructed to match, or track, the components of specific market indexes, which can be volatile and can decline significantly in response to adverse issuer, political, regulatory, market, or economic developments.
The information in this presentation is being provided for general educational purposes only and is not intended to be relied upon as a forecast, research, or investment advice regarding a particular investment or the markets in general, nor are they intended to predict or depict performance of any investment or serve as a recommendation or offer to buy or sell securities. Any examples provided are for informational purposes only and are not intended to be reflective of actual results. There is no assurance that the investment process will consistently lead to successful investing.
Diversification does not guarantee a profit or protect against loss in declining markets.
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. 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.
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