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Specialization Means Outperformance, Report Claims

Large, diversified asset managers often underperform their smaller, more focused rivals, research shows.

Active managers can and do outperform passive strategies—but only if they are focused, disciplined, and retain a single investment process, according to Northill Capital.

“The average outperformance relative to benchmarks has been more than sufficient to fully offset the impact of institutional fees.”Managers “focused on a single core skill set” were shown to have “significantly” outperformed managers from generalist firms and passive funds over five years ending 2015.

“In many fields of human endeavor specialization results in superior performance,” Northill’s report stated. “The same truism applies to asset management. Our research demonstrates a clear and persistent link between the managers who focus on a single core skill set and their success in delivering outperformance for their investors.”

Northill—which provides start-up capital to investment boutiques—compared the performance of more than 2,000 active US equity funds. The “most focused” funds—defined as those with a single investment process and a disciplined approach to capacity—added 116 basis points of performance a year above their benchmarks, Northill reported.

The effect was similarly evident in European equities, emerging market equities, and to a lesser extent in global equities, Northill found.

“The average outperformance relative to benchmarks generated by the most focused managers has been more than sufficient to fully offset the impact of institutional fees on performance in each of the asset classes we have examined with the exception of global equities,” the report continued.

“Average” active managers in US fixed income, global equities, and US equities failed to outperform their benchmarks after fees during the period reviewed, Northill found.

“In truly focused active asset management firms all professionals work as one team to deliver the best possible investment results,” said Jon Little, partner at Northill Capital. “The key decision makers also tend to hold a meaningful proportion of the firm’s equity. Their success and the long-term value of the firm are defined solely by the outcomes delivered for all clients.”

Asset management firms with multiple strategies, processes, and asset classes risk becoming “sidetracked” from investment performance, Little argued. “These tensions destroy teamwork, damage firm culture, and distract investment professionals,” he said.

In contrast, a clearer alignment of interests between asset owners and specialized managers “maximizes the probability that investors will achieve long-term successful investment outcomes,” Little argued.

Read Northill Capital’s full report, “Nowhere to Hide: Focused Active Asset Managers Outperform.”

Related: The Not-So-Special Specialists & The Asset Managers of Downton Abbey

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