Northill Capital, a London-based asset manager, has released a report defending active asset management from the common charge that it cannot, after costs, beat the passive managers. That is an old and familiar subject for debate.

What cannot be debated, because it is a simple matter of definition and arithmetic, is this: for any given market, alpha nets out to zero. The market as a whole cannot outperform the market as a whole. Those who do outperform the whole, then, must do so because others underperform.

If an index tracking a certain market or sector is doing its job, then alpha as defined against that index will, again, net out to zero. This fact doesn’t exclude the possibility that such factors as managerial skill might play a role in determining who is on the positive side before this netting. By trying to elucidate that possibility, one wades into a bloody crossroads.

Adding Something New  

Where Northill adds something new to this familiar ground is in the distinction it draws between specialists (whom it calls “focused” asset managers) and unspecialized, presumably unfocused, generalists. In the words of partner Jon Little, “This report provides evidence of a persistent link between asset managers focused on one asset class and their success in delivering outperformance to investors.”

The problem with generalists? The report contends that part of their problem with trusting your wealth to a generalist is the continual distraction such folks suffer from the launch or new investment strategies or products, when they ought to stick to their knitting. Also, generalists can easily fall into the trap of growing their Assets under Management beyond their capacity; this is less of a problem for those management teams committed to making one investment process work. Finally, even when generalism seems to work, it will work by virtue of the talents of one or a few key people, and investors are rightly wary of this “key man” risk. The key man can always be run over by a bus. A single strategy approach allows for a “collegial, team-oriented” culture.