The Singular Impact of High Conviction Overweight Positions for Active Managers

Abstract

Is active management’s decade‐long losing streak to passive management due to high fees, a lack of manager skill, or something else? What’s required to answer this question is not rampant speculation but a fact‐based assessment of manager decision making, and the facts need to come from analysis of daily stock holdings of mutual funds. As the saying goes, “You cannot manage what you cannot measure.”

Key findings:

- The only source of stock selection alpha comes from managers’ High Conviction Overweight positions.

- The average active fund manager reduced their sole source of excess return (High Conviction
Overweight) by half, severely diluting their ability to outperform after fees.

Shorter version of this paper published on CFA website.

Keywords: Portfolio Active Management

JEL Classification: G11, G10