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Generating consistent alpha: Focusing on fundamental ‘active insights’ over style factors

Low-cost, systematic products fuel the active/passive debate. Can a 'goldilocks' active portfolio be built? We believe consistent alpha with lower tracking error is possible by removing style factor cyclicality & focusing on deep fundamental insight.

Download the PDF here
Date published
4 Jun 2024
Matthew Davison Portfolio Manager
Sam Li, CFA Portfolio Manager

A strategy for the evolving landscape

At Martin Currie Australia (MCA), we believe that true alpha is best derived from fundamental analyst insights. As such, our proprietary forward-looking research lenses and deep expertise drive the construction of all our actively portfolios.

The proliferation of low-cost, systematic Smart Beta products, based on style factors such as value or quality, have blurred the lines in the ‘passive vs. active’ debate. However, we fear that investors risk losing out on some or all of the benefits of fundamental insights. Limitations include the backwards looking nature of factors used, potential high turnover costs, that they are prone to missing turning points in the market, and that they can still underperform the market for significant periods of time.

The shift in investor taste has also exposed the fact that many active fundamental portfolios can be afflicted by the same style factors as Smart Beta. However, these approaches can also show high tracking error, and thus need longer time horizons. This is increasingly less aligned with the risk budget of asset owners facing strict performance benchmarks such as the Your Future, Your Super (YFYS) performance test.

We believe that a ‘goldilocks’ efficient portfolio of consistent alpha/lower tracking error can be achieved by reducing the impact of style factor cyclicality in the alpha stream of an active fundamental portfolio. To address these issues, we developed MCA Active Insights, a strategy that aims to deliver alpha from our investment team’s ‘pure’ fundamental insight whilst minimising such style factor and sector biases. We do this using a unique quantitative process.

With the influence of style factors substantially reduced, and a focus on deep fundamental insight and disciplined risk control, we believe that the MCA Active Insights strategy can:

  • reduce the reliance on systematic style factor biases and mean reversion;
  • focus the source of alpha on ‘pure’ fundamental insight;
  • embed ESG risk management and active ownership in a way that is difficult for passive, systematic or quantitative strategies to emulate;
  • provide investors with tailorable tracking error targets to meet tight risk budgets; and
  • ultimately provide a more persistent and efficient alpha stream at a lower cost.

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  • Learn more about our Active Insights strategy here, or contact a member of our sales team for more information.

Important information

This information is issued and approved by Martin Currie Investment Management Limited (‘MCIM’), authorised and regulated by the Financial Conduct Authority. It does not constitute investment advice. Market and currency movements may cause the capital value of shares, and the income from them, to fall as well as rise and you may get back less than you invested.

The information contained in this document has been compiled with considerable care to ensure its accuracy. However, no representation or warranty, express or implied, is made to its accuracy or completeness. Martin Currie has procured any research or analysis contained in this document for its own use. It is provided to you only incidentally and any opinions expressed are subject to change without notice.

The document does not form the basis of, nor should it be relied upon in connection with, any subsequent contract or agreement. It does not constitute, and may not be used for the purpose of, an offer or invitation to subscribe for or otherwise acquire shares in any of the products mentioned.

Past performance is not a guide to future returns.

The views expressed are opinions of the portfolio managers as of the date of this document and are subject to change based on market and other conditions and may differ from other portfolio managers or of the firm as a whole. These opinions are not intended to be a forecast of future events, research, a guarantee of future results or investment advice.

Some of the information provided in this document has been compiled using data from a representative account. This account has been chosen on the basis it is an existing account managed by Martin Currie, within the strategy referred to in this document. Representative accounts for each strategy have been chosen on the basis that they are the longest running account for the strategy. This data has been provided as an illustration only, the figures should not be relied upon as an indication of future performance. The data provided for this account may be different to other accounts following the same strategy. The information should not be considered as comprehensive and additional information and disclosure should be sought.

The information provided should not be considered a recommendation to purchase or sell any particular strategy / fund / security. It should not be assumed that any of the security transactions discussed here were or will prove to be profitable.

It is not known whether the stocks mentioned will feature in any future portfolios managed by Martin Currie. Any stock examples will represent a small part of a portfolio and are used purely to demonstrate our investment style.

Risk warnings - Investors should also be aware of the following risk factors which may be applicable to the strategy shown in this document.

  • Investing in foreign markets introduces a risk where adverse movements in currency exchange rates could result in a decrease in the value of your investment.
  • This strategy may hold a limited number of investments. If one of these investments falls in value this can have a greater impact on the strategy’s value than if it held a larger number of investments.
  • Smaller companies may be riskier and their shares may be less liquid than larger companies, meaning that their share price may be more volatile.
  • The strategies may invest in derivatives (index futures) to obtain, increase or reduce exposure to underlying assets. The use of derivatives may restrict potential gains and may result in greater fluctuations of returns for the portfolio. Certain types of derivatives may become difficult to purchase or sell in such market conditions.

Risk warnings for the back-test – The back-test results presented in this document are based on simulated performance results. Please be aware these have certain limitations. Back-tested performance returns do not represent the impact of trading. The trades in the back testing have not been executed and may not fully reflect the impact of market factors such as liquidity. Martin Currie makes no representation that any account will or is likely to achieve returns similar to those illustrated as a result of the back testing presented in this document.