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Ankura shoots down core/satellite approach
The core/satellite equity management approach popular with many super funds has underperformed other active manager styles, particularly in the high volatility environment seen in the past few years, according to Ankura Capital.
In a summary analysis derived from the Mercer return database covering the past five years and showing relative over or underperformance of growth, value, core, quantitative and multi-manager strategies, multi-managers populate the lower end of the table, with value and growth dominating the top end.
The entire sample of active managers have a better record than the passive option in the analysis, even after the passive approach is given a 30 basis points bonus taking into account the lower fees.
The underperformance of high volatility managers since the onset of the global financial crisis combined with the consistently lower returns of passive management means the core/satellite approach is potentially embracing a “worst of both worlds” approach, according to Ankura Capital managing director Greg Vaughan.
“The worst thing you can do, based on this analysis is to have a passive core which suggests you’ll almost definitely outperform everyone, and then put that together with high volatility managers and attempt to compensate for the passive core,” Vaughan said.
Funds use passive managers to dilute the higher fees of active managers and that is where they can get into trouble, he said. Because passive managers are almost guaranteed to underperform, funds with a passive core need to outperform disproportionately to compensate.
Many large funds have opted to revisit passive cores because they have been frustrated with the performance of their manager mix, but they would be better served building a core around moderate risk core managers, Vaughan said.
“You really only want a core which is performing in line with the active return that’s out there. Having a wider number of moderate volatility managers has been a more successful approach over recent years,” he said.
A breakdown of high, moderate and low volatility managers into 66 rolling three year periods showed that prior to September 2007, high volatility managers beat the median in 80 per cent of the periods, but since then, moderate volatility managers outperformed high volatility managers in 85 per cent of the intervals. Low volatility managers beat the median performance less than 20 per cent of the time across the overall analysis.
AUTHOR
Mike Taylor
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