Reading 36 Section 5.6: Tests of Benchmark Quality:
An active position is an account’s allocation to a security minus the corresponding weight of the same security in the benchmark. For example, assume an account has a 3% weighting in General Electric (GE). If the benchmark has a 2% weighting in GE, then the active position is 1% (3% – 2%). Thus, the manager will receive positive credit if GE performs well. Actively managed accounts whose investment mandates permit only long positions contain primarily securities that a manager considers to be attractive. When a good custom security-based benchmark has been built, the manager should be expected to hold largely positive active positions for actively managed long-only accounts.15
Note that when an account is benchmarked to a published index containing securities for which a long-only manager has no investment opinion and which the manager does not own, negative active positions will arise. A high proportion of negative active positions is indicative of a benchmark that is poorly representative of the manager’s investment approach.
In the above section, the reading suggests that a good benchmark is so defined such that a high % of its benchmark names are held overweight (or “positive active position”). No mention is made as to what constitutes a “high %,” but for argument’s sake, let us say that a “high %” equals 75%.
For a large majority of portfolio managers, the investment mandate is long-only and leverage, short selling, & derivs are prohibited, such that any over weights must be matched with an underweight. Therefore, the best this % could ever be would be 50%. Furthermore, if an aggressive overweight is selected, such that multiple securities must be under weighted to free up the allocation bps, this number quickly declines.
For reference sake, I am a PM for an institutional investment firm. I cover Consumer Staples and am benchmarked to the S5CONS Index. My index holds 33 names in large cap staples and at any given time, I am only overweight 7-9, i.e. 21-27% “positive active positions”
In practice, I don’t see this measure as helpful at all. Any insights?