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International Equity Funds: Defensive-Active Strategies Pay Off Long-Term


Date: Friday, February 17, 2012
Author: Brian Bollen's Blog

In a recent study Morningstar Italy, a provider of independent investment research, examined the strategies employed by successful actively managed international large cap equity funds. The result: defensive-active strategies outperform both aggressive-active management and passive management approaches.

Fund managers are more successful over the long term if they pursue a defensive-active investment strategy. This is the finding of a recent study by Morningstar Italy, which says the aim of the study was to identify the defining characteristics of successful active equity fund managers.

To this end, Morningstar analysed more than 1,300 international large cap equity funds distributed in Europe with track records of at least 10 years.

All of the funds were examined with a view to whether the fund management was able to generate excess returns (alpha) relative to the benchmark MSCI World Index while protecting the portfolio in adverse markets.

90 funds consistently successful

In total, 736 of the funds analysed saw positive performance during the overall period from October 2001 to October 2011. 90 of these consistently generated positive performance. Throughout every one of the observation periods (one, two , three, five and 10 years), these funds were all among the top 20% in their class. It was found that defensive strategies – i.e. funds with a beta of less than 1 – performed better on average than passive (beta = 1) or aggressive (beta > 1) strategies. The beta of a portfolio is a number describing the relation of its returns in up and down market phases compared with the benchmark.

A further metric, the 'downside capture ratio', was used by Morningstar to measure the ability of managers to protect their portfolios in bear markets. Managers who achieved especially good marks for this ratio also generated better overall annual performance. At the same time, these funds exhibited a lower level of downside risk measured in terms of semi-standard deviation.

“The present study demonstrates that active management approaches pay off when compared to passive strategies. Especially in volatile times, defensive strategies – of the type used by DJE Kapital AG for our globally investing Gamax Funds Junior – are particularly successful at generating alpha against the broad market,” says Furio Pietribiasi, chairman of the board of directors of Gamax Management AG.