Large Cap Commentary – July 2015
A measure of the percentage of stock holdings in a manager’s portfolio that differ from the benchmark index.
I thought I would shake things up with a new introduction and bit of a lesson this month. What exactly is the term defined above, how does it apply to Argent and why should you care? The definition above is for the term Active Share. As the definition suggests, Active Share measures the difference between a manager’s portfolio and the index against which the manager is being compared. For Argent’s Large Cap Growth Equity portfolio this is the Russell 1000® Growth Index and the S&P 500® Index. As you know, we at Argent are active investors. In other words, we do not seek to mimic an index, instead we seek to outperform the index. Intuitively, an active manager would have better odds of beating an index if stocks in the manager’s portfolio were different than the index. The analogy I like to use for this is that it is hard to outrun your shadow.
There are a few impressions I would like you to take away from the chart, which portrays how “active” is a manager. The first and most obvious is that Argent (represented by the blue dot) is very active. This is not purely by design, but rather an outcome of our disciplined investment process. If a company meets our criteria of favorable odds, possesses a catalyst for change with consequent improvement in results that are validated by our Main Street Contacts, we purchase the stock for our portfolio. We purchase individual stocks because our process has determined they have unique traits with a greater likelihood to outperform, or beat the index than an average company.
The second impression I would like you to observe in the graphic is that the spread in active managers has been widening over time. The grey bars represent quartiles which measure how different managers are from the index. The bars lengthening with time implies that some active managers are becoming less active, or more similar to the index. Going back to my analogy, these funds are essentially shadowing an index. Shadowing an index makes it more difficult to achieve outperformance. In addition, these funds are charging higher fees – active management fees – while not necessarily delivering an active product.
The debate surrounding whether to index or to seek active share will likely rage on for many years. Regardless of the outcome of these debates, we at Argent Capital will always adhere to our disciplined investment approach. We will only select those stocks which meet our strict investment criteria and we will always manage our portfolio with the aim of beating the index on a consistent, long-term basis. As always, we appreciate your interest in Argent Capital Management.
Senior Portfolio Manager
Views expressed herein represent the opinion of the portfolio manager as of the date above and are subject to change. A list of stocks recommended by Argent is available upon request. Past performance is no guarantee of future results.