Passive or active allocations: What suits your large-cap investing?
Overlapping risk: A wolf in sheep’s clothing When determining the investment approach for large-caps, be it active or passive, one must analyse the overlapping factor which is an unavoidable constant in the dynamic world of large- cap funds. Data suggests that 73% of the large-cap funds have 40-60% overlapping. Some overlap is a given in the large-cap world, but excessive overlap reduces all the benefits one can get from excess diversification, irrespective of whether the approach is active or passive.
When you invest in multiple funds from the same large-cap universe without realizing the consequences, there is a high chance of an overlap of a few stocks. And if these stocks perform negatively, all the funds in the portfolio will also deliver negative performance. The aim of diversification is to spread risk.
Since the large-cap universe is a relatively small one, overlapping is one of the major issues. Hence, one should be mindful of the risk and accordingly diversify in their choices of funds and mitigate that risk whatever approach they take, either active or passive. Active share: earning their salt – top quartile funds Large-cap funds must invest 80% of the corpus in large-caps.
Active mutual funds rely on the fund manager’s expertise to select the best large-cap stocks. However, only having a high active share is not enough. They also have to outperform their benchmark indexes as well.
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