Data suggests that active managers who can protect in down markets are more likely to generate better relative performance over time.
- Active share and its ability to identify managers with the potential to outperform their benchmarks has been increasingly embraced by the investment community. But in theory, an equity manager who looks nothing like their benchmark can still own low-quality companies that ultimately produce poor investment returns.
- Decision-makers, in our view, can enhance their use of active share and, thus, their statistical toolkit for evaluating managers. We introduce the Polen Score and its counterpoint, the Active Upside Score. The “Scores” marry active share with capture ratios using a simple formula.
- The research in this paper shows that the combination of downside capture and active share is a more meaningful contributor to relative outperformance than active share alone and highlights the utility of the Polen Score.