Wednesday, July 7, 2021

Sweating the details matters for investors


Preparing for the annual Russell reconstitution announcement is second nature for passive index managers, but it should also be a natural part of any active manager discussion, even for global macro managers. The reconstitution problem is not just a Russell index issue. 

It should be obvious that the characteristics of equity and bond benchmarks today and not the same as a few years ago. They will be similar but not the same, so all the factor sensitivities to these indices will be slightly different. There will be error in any beta calculation to macro factors given index characteristics are changing. For example, the sector weights for an equity index may vary, so growth or inflation betas may differ through time. For fixed income, duration changes will impact rate sensitivities. 

Investment skill must sweat the structural details. There is no room for the dilettante who is not versed with market details because knowing the details converts into "loose change" and the summation of these pennies becomes real in a low-rate environment. Knowing the details is not a matter of being able to engage in market conversation but understanding that the craft of asset management requires a focus on getting all the structuring associated with a trade idea and execution correct. 

A good idea executed badly may generate less return than an average idea executed well. 

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