Importance of Strategy

Successful active managers understand the economic and market return factors driving individual stock returns and, in turn, devise an investment strategy that exploits these return factors. A manager’s equity strategy is the way a stock is analyzed, bought and sold.

In order to beat the market, it is necessary to systematically identify mispriced stocks, buy them and ultimately sell them when they are no longer mispriced. There are numerous ways to accomplish this, as evidenced by the many approaches employed by active equity managers. In order to win this game, the manager must outsmart the market. Equity strategy is the way a manager goes about outsmarting the market.

As we observe in business elsewhere, one of the keys to success is developing a specialized set of skills that are focused on a specific market segment. In equity markets, the specialized skills are summarized by the fund’s strategy profile, while the market segment is represented by the specific return factors exploitable by this strategy. The fund employs this skill set, aimed at exploiting specific return factors, which allows the manager to outsmart the market.

For example, a Competitive Position fund must develop a specialized approach and skill set for gathering critical company, product market, and distribution information. One such skill is the ability to assess the quality of the company’s management team by using available data combined with face-to-face company visits.

The Competitive Position fund’s goal is to identify those companies that can defend their market presence in the face of ever-changing economic and market conditions. If the fund is successful in identifying such companies, then the stocks purchased will outperform those not purchased. Consequently, the approach and skill set developed by the Competitive Position fund, as summarized by the fund’s strategy profile, allows it to exploit a specific set of return factors and, in turn, outperform. Clearly, then, the successful execution of the equity strategy is the reason the fund is able to outsmart the market.

Successful active managers relentlessly pursue a narrowly defined strategy, while at the same time concentrating on their best strategy stock ideas. That is, focusing on a core competency pays in the world of active equity mutual funds. Investment specialists, not generalists, are the top investment performers.

The bottom line is that strategy matters.