A passively managed fund replicates a specific index or market segment. In effect, it tracks a benchmark and mirrors its performance. This form of investing essentially amounts to “being the market”.
By contrast, an actively managed fund has the freedom to deviate from its benchmark in pursuit of outperformance. This form of investing, at least ideally, revolves around “beating the market”.
This is the job of abrdn Asia Focus plc’s investment team. As active managers, we use our insight and experience to try to identify businesses that will deliver outperformance over the long term.
Introducing active share
Clients pay extra fees for active management. They might therefore feel annoyed – if not somehow cheated – if an actively managed fund bears a conspicuous resemblance to its benchmark.
A concept known as active share can be useful here. Conceived around 20 years ago in an academic study, it is a measure used to gauge the extent to which a fund’s holdings differ from those of its underlying index.
A pure index fund – that is, a fund that is entirely passive – has an active share of 0%. At the other end of the scale, a fund that has no overlap at all with its benchmark has an active share of 100%.
Our active share currently stands at around 97%. This is obviously a high figure, especially for an Asia-focused strategy. We feel it is helpful to explain how and why this has been achieved.
Differentiation through insight
The first point to note is that our closest benchmark is the MSCI AC Asia ex Japan Small Cap Index, which consists of more than 1,700 stocks. This obviously provides us with ample scope for differentiation, with our portfolio typically comprising only 50 to 60 stocks.
In tandem, crucially, our investment decisions stem from our own in-depth research and on-the-ground engagement. They reflect our unique understanding of some of the most exciting economies in the world.
It is important to remember that Asian smaller companies are routinely overlooked by much of the investment community. Despite their attractions, many are the subject of little or no expert analysis.
This is why we believe our own process gives us a valuable edge. We feel we are strongly positioned to seek out promising businesses whose long-term potential is widely unappreciated.
Closet indexers and caveats
The study that introduced active share dismissed many actively managed funds as “closet indexers”. This is a derogatory term for strategies that barely deviate from their underlying indices.
Another key finding was that funds with high active share can “significantly” outperform their benchmarks – even after expenses. They can also exhibit “strong performance persistence”.
In truth, high active share does not guarantee outperformance. There are many dynamics that can have an influence, and there is plenty of evidence of such funds underperforming.
It is also vital to acknowledge that passive funds may be a better fit for some investors. They could particularly favour those who prefer broad exposure and have certain risk-related requirements.
A focus on long-term benefits
What cannot be disputed is that a high active share is necessary to move beyond mere replication. Logic alone tells us a fund can hope to outperform its benchmark only if it deviates from it in the first place.
As a result of our own approach, there is often scant overlap between the abrdn Asia Focus plc portfolio and the index against which its performance is benchmarked. The two’s respective top 10 holdings have hardly ever coincided.
Yet the goal is not to be contrarian just for the sake of it. Nor is it to “game the system” and so avoid “closet indexer” accusations. The objective is instead to deliver superior performance over time.
The “passive versus active” debate will no doubt rumble on. But we are confident that our investment process is capable of demonstrating the long-term benefits of favouring the latter camp.
Important information
- The value of investments, and the income from them, can go down as well as up and investors may get back less than the amount invested.
- Past performance is not a guide to future results.
- Emerging markets tend to be more volatile than mature markets and the value of your investment could move sharply up or down.
Other important information:
Issued by abrdn Fund Managers Limited, registered in England and Wales (740118) at 280 Bishopsgate, London EC2M 4AG. The company is authorised and regulated by the Financial Conduct Authority in the UK.
Find out more at www.abrdn.com/aas or by registering for updates. You can also follow us on X and LinkedIn.