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

CFA Level III
#1

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!

#2

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.

#3

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)?

#4

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

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