Ben Alge talks about Active Share
There are at least two things that differentiate our distinctively active funds at Touchstone Investments. First, we hire institutional asset managers who have demonstrated historical success in their respective asset classes. Second, those managers employ investment strategies that are truly different from the benchmark.
All of Touchstone's funds are actively managed and are benchmark aware but not benchmark constrained, but Touchstone's distinctively active philosophy is born out of the realization that not all active is created equally. Distinctively active strategies are those that have evidenced the ability to deliver alpha historically and have characteristics associated with future alpha as supported by objective academic sources.
Active share is one measure we consider as it tells us how different a fund is from its benchmark, which is helpful and a good starting point. But simply being different isn't enough. We look for additional elements backed by empirical data to identify managers with characteristics associated with long-term outperformance.
These include historical evidence of skill along with manager conviction, opportunity, patience, and reasonable expenses. We use the acronym SCOPE to incorporate all five elements.
In the Touchstone Focus Fund, we own approximately 25 to 35 businesses. The reason why we do that is we really are trying to invest in our best ideas. We typically hold 30 to 40 securities in the portfolio which we think is very well diversified because we're buying very low beta, high return on capital companies.
The active share concept was first introduced to the market in the mid-2000s by a couple of Yale professors who effectively tried to answer the question: are all actively managed funds created equal?
We take a long-term business owners mindset. We don't consider us trading paper. So we typically have a 5-year horizon. We don't know exactly how long our holding period's going to be. It's typically on average 2 to 3 years.
We like to base our analysis on a private equity approach, basing the shareholder creation factors on capital allocation, what's on the balance sheet, and what management can control today versus trying to speculate on what the future growth projections are for a company over time.
It was once believed that high conviction, highly concentrated portfolios were more risky than diversified portfolios. If you own seven stocks or 20 stocks, you're much more focused on looking at your downside protection. And that's where our disciplines come from.
Our approach to risk management is integrated into our investment process. Every business we buy in the portfolio is priced for very low returns on capital. We then look at the business and if the business has a barrier to entry that increases the probability that the market has it wrong, then we’re interested in that business.
We are quite enthusiastic about our distinctively active lineup. It is foundational to the value proposition we offer investors and helps characterize how we hire asset managers.