The case for setting up a high conviction strategy
In recent years, the number of passive investors and the amount of assets allocated to instruments that truly replicate an index has increased tremendously. In fact, a recent study found that about 80% of all assets under management are considered to be “low-conviction” strategies, and in absolute terms, they do mimic an index. Also in recent years, the average holding period has been reduced to a few weeks, while two decades ago, the average was about two years. In the sense that all of these strategies do the same thing at the same time, these are essentially passive investment strategies. One of the main shortcomings of such strategies is their lack of outperformance, resulting in a below risk-adjusted return for the investor.
One way of addressing the lacking risk-adjusted return is to consider a high-conviction call approach; the strategy crystallizes in a few investment opportunities, which are held over a prolonged period of time.