From this , the average active manager is likely to have more than one factor bias – size combined with another factor . With size as a factor finding it difficult to grind out strong relative performance in recent years , and value generally evident within a smaller part of the manager universe , this is helpful context to understand the relative performance of managers and why the average manager might underperform in periods that small caps underperform .
The best yearly performance for size was seen in 2020 and 2021 , and in those two years we naturally observe active managers performing better , with the average manager outperforming by 3.5 % over that time period . Without an understanding of how size performed , and the exposure to factors by managers , it would have been tempting to put everything down to the manager , and we certainly know that is not the case ( on the up- or downside ).
Putting the macro and micro together
The active UK equity manager universe offers exposure to a range of factors – size is a predominant factor , but other factors are also available for investors . From the macro overview , we can see how factor performance changes over market cycles . We can see clearly how this has impacted active manager performance in the UK , and it can also be applied to other regions .
Given factor exposure can reveal much of the realised and expected performance of managers , consistency or stability of factor exposure is important .
For instance , is the factor exposure stable or does the manager try to ‘ factor time ’ the market ? If the latter is true , how credible is that part of the investment process ? If the manager claims to be a pure stock picker , it is important to look for evidence of a manager ’ s consistency to a factor , and this should be across different time periods and market environments . Hence , a robust manager research process is key to carry out this work in a consistent fashion .
For those that build portfolios , understanding a portfolio ’ s factor exposure over time is also important in understanding the portfolio ’ s performance . We prefer creating portfolios with balanced factor exposures that we could tilt across different factors over time . This avoids the reliance on one particular factor in determining the outcome of a portfolio ’ s performance , and instead brings a team-based approach to factor investing .
In our sport of seeking to achieve long-term investment excellence , we believe taking a factor consistent approach to manager selection and portfolio construction can make a big difference in overall portfolio outcomes .
Key risks
The value of investments and the income from them can go down as well as up and you may not get back the amount invested . Past performance is not a guide to future performance .
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