What makes a good active equity manager?

Back to basics The world of equity funds is becoming increasingly diverse and offers a bewildering array of strategies. How should one best navigate this and find the most suitable fund? By not forgetting the basics! A solid starting point is ascertained by defining a risk budget. Once determined you will find that you create a narrower and more manageable universe which still offers many interesting approaches to finding outperformance in equity markets. You can thus evaluate potential returns relative to the risk budget by using measures such as the Sharpe ratio. Some active managers add value by implementing high conviction ideas. This means finding someone who thoroughly knows their stocks, the stories behind them and the ‘right’ price for each stock. A relatively concentrated portfolio of around 40-60 ideas can allow for this degree of focus and allows utilisation of the best research ideas. From a risk perspective, the investor can perhaps seek some comfort from the idea that a stock story must be very strong before it makes it into or indeed is sold out of a relatively small portfolio.