P = M+S+A Difference btwn Style and Active management?

Hey guys,

What’s the difference btwn Style and Active management?

Picking a certain style seems like it’s active management to me. Maybe my definitions of style and active management are wrong?

Choosing a style (large cap growth, small cap growth, lrg value, small value) is going to be different from the benchmark, right? Wouldn’t that be still active mgmt?

Thx!

It is very subjective and depends on the benchmark selected.

Since S=B-M, if the benchmark used is a broad index then the manager would have more style influence than if the benchmark reflected a more narrow index that mimicked the managers normal portfolio.

For instance:

if the benchmark is the Russell 3000 but the portfolio is invested in SMID Caps the style would have a greater effect on the portfolio returns than if the benchmark was the Russell 2000.

Just because the portfolio is mandated to follow a specific strategy that is not fully captured by the benchmark does not mean that those return differences should be attributed to manager skill.

Any insights on?

It says that there should be a +ve relationship btn (B - M) & (P - M)

It also says that Active (P-B) return should be uncorrelated with Style return (B-M)?

B and M are distinctly different asset classes . Since the manager is tracking B ( i.e. he generates his picks mainly from B ) , his tracking error is lower w.r.t B . He is not tracking to M , so he will have a higher tracking error to M.

Also B and M are distinct so they do not track each other.

So you have B and P in one camp , correlated to each other and M in another , uncorrelated to either.

P-B should show low tracking error while B-M ( which is not controlled ) should show higher tracking error