ETFdb Logo
ETFdb Logo
  • ETF Database
  • Channels
    • Themes
      • Active ETF
      • Artificial Intelligence
      • Beyond Basic Beta
      • China Insights
      • Climate Insights
      • Core Strategies
      • Crypto
      • Direct Indexing
      • Disruptive Technology
      • Energy Infrastructure
      • ETF Building Blocks
      • ETF Investing
      • ETF Education
      • ETF Strategist
      • Financial Literacy
      • Fixed Income
      • Free Cash Flow
      • Innovative ETFs
      • Institutional Income Strategies
      • Leveraged & Inverse
      • Managed Futures
      • Market Insights
      • Modern Alpha
      • Multifactor
      • Responsible Investing
      • Retirement Income
      • Tax Efficient Income
    • Asset Class
      • Equity
        • U.S. Equity
        • Int'l Developed
        • Emerging Market Equities
      • Alternatives
        • Commodities
        • Gold/Silver/Critical Minerals
        • Currency
        • Volatility
      • Fixed Income
        • Investment Grade Corporates
        • US Treasuries & TIPS
        • High Yield Corporates
        • Int'l Fixed Income
    • ETF Ecosystem
    • ETFs in Canada
  • Tools
    • ETF Screener
    • ETF Country Exposure Tool
    • ETF Sector Tracker Tool
    • ETF Database Categories
    • Head-To-Head ETF Comparison Tool
    • ETF Stock Exposure Tool
    • ETF Issuer Fund Flows
    • Indexes
    • Mutual Fund To ETF Converter
  • Research
    • ETF Education
    • Equity Investing
    • Dividend ETFs
    • Leveraged ETFs
    • Inverse ETFs
    • Index Education
    • Index Insights
    • Top ETF Sectors
    • Top ETF Issuers
    • Top ETF Industries
  • Webcasts
  • Themes
    • AI ETFs
    • Blockchain ETFs
    • See all Thematic Investing ETF themes
    • ESG Investing
    • Marijuana ETFs
  • Multimedia
    • ETF 360 Video Series
    • ETF of the Week Podcast
    • ETF Prime Podcast
    • Video
  • Company
    • About VettaFi
    • Get VettaFi’ed
  • PRO
    • Pro Content
    • Pro Tools
    • Advanced
    • FAQ
    • Pricing
    • Free Sign Up
    • Login
  1. Active ETF Channel
  2. The Pitfalls of High-Conviction Strategies
Active ETF Channel
Share

The Pitfalls of High-Conviction Strategies

Karrie GordonAug 05, 2021
2021-08-05

Active managers are increasingly being swept up in the high-conviction investment craze that follows the logic that portfolio managers should only invest in their best ideas. Doing so should result in better performance, but a new study from Cabot Investment Technology and JANA Investment Advisers finds that isn’t always the case, reports Institutional Investor.

High-conviction, concentrated strategies are being employed in greater numbers lately by asset managers who are aiming to beat index performance, in a bid to lure more investors away from passive investing. However, there are many pitfalls when it comes to launching funds with this type of strategy.

Academic research in the past has shown a positive correlation between conviction and high returns, but that is when a sampling of hundreds to thousands of portfolios are studied en masse, explained Michael Ervolini, founder and CEO of Cabot and co-author of the report. On an individual portfolio manager basis, the positive results tend to be difficult to replicate, and sometimes even lead to a decrease in ROI.

There are a lot of factors to consider in this type of portfolio creation and management. “Simply increasing the active weight of a few positions and/or reducing the number of positions held can and does lead to lower performance with startling regularity,” the report said.

By reducing the number of investments carried within a strategy and concentrating the portfolio, these individual asset managers are opening themselves up to risk in an area they are potentially less comfortable in, as well as picking fewer high-performing securities.

The report gave the example of a portfolio with 50 assets and a 60% turnover rate in which the portfolio manager only needs to have a success rate of half winners compared to the total amount of securities bought in order to beat the benchmark. “Now if under a high conviction regime, the manager is selecting only 8-12 new positions each year, it is possible that the proportion of winning names can go down (so that the success ratio drops to 1/3),” the report said.

Other potential missteps by individual portfolio managers found in the study might be selling too slowly, or else decreasing turnover because of potential attachment to favored stocks in their concentrated funds. On the other end, these same portfolio managers could be falling victim to adverse selection in which they make the wrong judgement calls because of pressure, or else they may not entirely understand their buy process.

“High conviction might be a good target for many managers, but the process of getting there is fraught. There’s so much noise in the academic arena about this that you end up believing it can fit anybody. But it’s hard to retool your processes, both practically and emotionally,” said Ervolini.

T. Rowe Price Avoids High-Conviction ETFs in Favor of Tried and True Methods

T. Rowe Price approaches active management from a deep foundation of research and possesses over eight decades of experience. The portfolio managers at T. Rowe Price average 22 years of experience in the industry, and the active ETF portfolio managers bring a deep wealth of knowledge to the funds they oversee.

Through experience, discipline and the contribution of over 475 investment professionals, T. Rowe Price avoids the pitfalls that many individual portfolio managers succumb to. They offer a variety of actively managed ETFs with a wealth of holdings, diversifying across industries and following a bevy of core strategies that cater to a wide range of investors.

For more news, information, and strategy, visit the Active ETF Channel.


Content continues below advertisement

Loading Articles...
Our Sites
  • VettaFi
  • Advisor Perspectives
  • ETF Trends
Tools
  • ETF Screener
  • Mutual Fund to ETF Converter
  • Head-To-Head ETF Comparison
  • ETF Country Exposure Tool
  • ETF Stock Exposure Tool
  • ETF Database Pro
More Tools
  • Financial Advisor & RIA Center
Explore ETFs
  • ETF News
  • ETF Category Reports
  • Premium Articles
  • Alphabetical Listing of ETFs
  • Browse ETFs by ETF Database Category
  • Browse ETFs by Index
  • Browse ETFs by Issuer
  • Compare ETFs
Information
  • Contact Us
  • Terms of Use and Privacy Policy
  • © 2023 VettaFi LLC. All rights reserved.

Advertisement

Is Your Portfolio Positioned With Enough Global Exposure?

ETF Education Channel

How to Allocate Commodities in Portfolios

Tom LydonApr 26, 2022
2022-04-26

A long-running debate in asset allocation circles is how much of a portfolio an investor should...

Core Strategies Channel

Why ETFs Experience Limit Up/Down Protections

Karrie GordonMay 13, 2022
2022-05-13

In a digital age where information moves in milliseconds and millions of participants can transact...

}
X