Don't Invest in Funds That Do This!
The two funds here that are actively managed, CNQ and BKCG, offer absolutely no information about how they select their names. The output looks a lot like the top 20 or 30 names in the index with a heavy tilt towards tech. Look, I've been in manager research for most of my career, 20 years of the 25 that I've been in this business.
You can tell me stuff without telling me stuff, like when you sit down with your investment committee and you have a screen, and you have some factors you screen for, and it gives you a universe, right? You're going to select from that universe using certain expertise, but you can at least tell me what you're screening for. In fact, at least BKCG gave me something, some general idea. I actually wrote down they have a list of things that they look for: industry leadership, global prominence, strength of management, strength of financials, and then growth expectations based on their proprietary model of how they calculate that.
For CNQ, I watched every video on that website, the website for ALA. I read through the statement of additional information. I know nothing about how the manager selects stocks. I know literally nothing other than we want to be invested in the names of the future. How that's defined, what they look for, how they select, nothing. I have no idea how they pick their names.
For that reason, it's really hard to take that leap to, as Tony said, pay 55 basis points for active management when you don't have any information about how the manager is generating alpha and no ability to actually check if what they say matches the output, right? A lot of the reasons why you want to know these things is because you're trying to set return expectations, so you kind of understand how this might behave over a market cycle. In order to do that, you oftentimes take the information they tell you and then say, "Okay, if I did a plain vanilla version of this, would it move?" Maybe not get you the same returns, but at least give you movements in the same direction so that you can understand if I did this plain vanilla versus how they're doing it.
Are they adding some level of skill that I can't get? I can't do that because I have no idea what they're doing. To Tony's point, you want to see high active share in a concentrated portfolio. That's why you buy a concentrated portfolio for the active share. If you don't have high active share, and by high active share, Tony said over 50, it should be in the 70s, if not higher, if you're going to do a concentrated portfolio and take that kind of risk. If you don't get that, then you're paying up for closet indexing. You're not actually getting a concentrated portfolio that's an alpha generator.
