Dan Chung: Generating Alpha through Focused Strategies
April 19, ​2018
Passive investment strategies represent a growing portion of portfolios. As such, investors are under pressure to find complementary sources of market outperformance. In the search for alpha, investors are increasing their allocations to focused strategies, or investment strategies with 50 or fewer securities. We recently asked Greenwich Associates to explore the appetite for and popularity of focused strategies. The resulting study, “The Power of Focus,” indicates that a significant shifting of client assets to focused strategies is likely to continue in 2018 and beyond.

​The need for alpha is dire. Despite a multiyear bull market, investors are under pressure to find more sources of alpha given their attempt to keep pace with growing and future liabilities. Additionally, funding levels for many of the largest U.S. public pensions have fallen and many investors have low savings rates. Finally, allocations to beta strategies may not meet investors’ return expectations.

So what is the best way to achieve these performance goals? Seventy-six percent of retail fund intermediaries in the Greenwich study believe that focused strategies have a better chance than diversified strategies of producing alpha. Institutional investors seem to be acting on similar beliefs. Data from eVestment, a well-known database of institutional asset managers, shows that “Number of holdings” ranks among the top criteria used by investors in manager searches for large-cap growth, value, and core strategies. This metric is used even more often than characteristics such as annualized alpha and fees.

When implementing focused strategies, the potential to generate alpha is the most important consideration of investors. The due diligence process for focused strategies should start by identifying how a manager attempts to create alpha. One study participant said, “It is OK to take risks, but not OK to be unaware of the risks taken.” Understanding how those risks and positions will correlate and interact with the positions that comprise the rest of the portfolio is crucial. This allows investors to achieve the risk-reduction benefits of diversification across strategies, while preserving the benefits of a manager’s alpha-generating ability.

In our next blog post, we’ll debunk the risk myth and explain how focused strategies have typically delivered lower risk in the form of beta and down market capture over the past 3, 5, and 10 years.

Fred Alger & Company, Incorporated is the parent company of Fred Alger Management, Inc. The views expressed are the views of Fred Alger Management, Inc. as of April 2018. These views are subject to change at any time and should not be interpreted as a guarantee of the future performance of the markets, any security or any strategies managed by Fred Alger Management, Inc. These views should not be considered a recommendation to purchase or sell securities.  Individual securities or industries/sectors mentioned, if any, should be considered in the context of an overall portfolio and therefore reference to them should not be construed as a recommendation or offer to purchase or sell securities.

Risk Disclosure:  Investing in the stock market involves gains and losses and may not be suitable for all investors. Investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost.

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