In order to be better than average, we need to be different. In other words, the portfolio must have high 'Active Share'. We view 'Active Share' as an important component of our investment philosophy.
'Among high Active Share portfolios – whose holdings differ substantially from the holdings of their benchmark – only those with patient investment strategies (i.e., with long stock holding durations of at least 2 years) outperform their benchmarks on average. Funds trading frequently generally underperform, regardless of Active Share. Among funds that infrequently trade, it is crucial to separate closet index funds – whose holdings largely overlap with the benchmark – from truly active funds. The average outperformance of the most patient and distinct portfolios equals 2.30% per year – net of costs – for retail mutual funds. Stocks held by patient and active institutions in general outperform by 2.22% per year and by hedge funds in particular by 3.64% per year, both gross of costs' (Cremers and Pareek, 2015)
By focusing on non-capitalization weighting schemes, active share and duration of holdings, we believe we can achieve excess returns for patient investors.
KDM Capital strategies are less appropriate for investors seeking a short-term oriented, tactical approach as we believe that is suboptimal.