Active Management Strategy: Human Intelligence Fund Analysis
Volker Schilling critiques passive indexing and 'index-hugging' active funds. He details the Human Intelligence Fund's strategy of copying high-conviction managers and the Zukunftsfonds' defensive multi-asset approach, emphasizing risk management and fee-performance ratios.
The Myth of Passive Superiority
Volker Schilling, CEO of Greif Capital Management, challenges the prevailing narrative that passive ETFs universally outperform active funds. He argues that the statistic claiming 70-90% of active managers fail is skewed by "index-hugging" funds that charge active fees for passive-like performance. Schilling advocates for a nuanced approach where investors select active managers only in inefficient markets, such as small caps and emerging markets, where human intelligence and deep analysis can generate alpha. In efficient markets like US large caps, he concedes that passive indexing is the rational choice.
The Human Intelligence Fund Strategy
The core of Schilling's active strategy is the Human Intelligence Fund, which operates as a systematic copycat of top-performing managers. Instead of relying on a single manager's judgment, the fund identifies the top 30 holdings of 190 high-performing managers and replicates their high-conviction positions. This approach leverages the "wisdom of the crowd" while filtering for proven outperformance. Despite a high Total Expense Ratio (TER) of 2.39%, the fund has outperformed the MSCI World by over 50% over five years, demonstrating that high fees are justified when they deliver superior net returns. The strategy involves high turnover, which precludes an ETF structure due to market maker spread costs, highlighting that transparency and vehicle structure must align with strategy mechanics.
Defensive Multi-Asset Risk Management
Schilling also details the Zukunftsfonds, a defensive mixed fund designed for risk-averse investors. Unlike traditional 60/40 portfolios, this fund employs a broad multi-asset strategy including bonds, commodities, crypto, and volatility derivatives. The key differentiator is its anticyclical risk management: the fund reduces risk assets when market volatility is low (indicating potential greed) and increases them when volatility spikes. This approach aims to limit maximum drawdowns to under 10%, ensuring investor retention during market stress. The fund has delivered 27% returns since the rate cycle began, outperforming cash alternatives while maintaining a lower volatility profile than its peers.
Conclusion
The episode underscores that investment success depends on matching strategy to market efficiency and investor risk tolerance. Active management is not inherently superior but is essential in specific niches. Investors must look beyond fee ratios to net-of-fee performance and understand the structural reasons behind fund design choices.
Key insights
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The high failure rate of active funds is largely due to "index-hugging" strategies that charge active fees for passive performance. True active management requires significant deviation from benchmarks, measured by Active Share and Tracking Error.
Impact: Investors can avoid underperforming funds by filtering for high Active Share and Tracking Error, ensuring they pay for genuine active management rather than passive mimicry.
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Active management generates alpha primarily in inefficient, low-coverage markets such as small caps and emerging markets. In efficient, transparent markets like US large caps, passive indexing is statistically superior.
Impact: Asset allocators can optimize portfolios by using active managers for niche exposures and passive ETFs for core efficient markets, improving overall risk-adjusted returns.
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The Human Intelligence Fund demonstrates that systematically copying the high-conviction holdings of top-performing managers can generate significant outperformance. This strategy leverages proven alpha sources rather than relying on a single manager's subjective judgment.
Impact: Fund managers can develop systematic strategies that aggregate the best ideas from multiple experts, reducing single-manager risk while capturing high-conviction alpha.
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Anticyclical risk management, where risk assets are reduced during low-volatility periods and increased during high-volatility periods, outperforms pro-cyclical approaches. This strategy limits drawdowns and improves investor retention during market stress.
Impact: Defensive funds can achieve better risk-adjusted returns by systematically adjusting exposure based on volatility signals, avoiding the trap of buying high and selling low.
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High fees are acceptable if they generate superior net-of-fee returns. Investors should evaluate the cost-performance ratio rather than judging funds solely on their expense ratios.
Impact: Investors can make more informed decisions by focusing on net returns after costs, recognizing that higher fees may be justified by superior active management capabilities.
Action items
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Filter active funds using Active Share and Tracking Error metrics to identify managers who genuinely deviate from their benchmarks. Exclude funds with low Active Share and high fees from consideration.
Impact: This reduces exposure to "index-hugging" funds that underperform after fees, improving the overall quality of the active portion of the portfolio.
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Allocate active management to inefficient markets such as small caps, emerging markets, and frontier markets. Use passive ETFs for efficient, transparent markets like US large caps.
Impact: This strategy captures alpha where it is most likely to be generated while minimizing costs in markets where active management is unlikely to succeed.
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Evaluate funds based on net-of-fee returns over a three-year period rather than gross returns or fee ratios alone. Compare the cost-performance ratio across peer groups.
Impact: This ensures that investors are paying for genuine value creation rather than high fees that do not translate into superior net returns.
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Implement anticyclical risk management in defensive portfolios by reducing risk assets when volatility is low and increasing them when volatility spikes. Use volatility indices like the VIX as signals.
Impact: This approach limits maximum drawdowns and improves investor retention during market stress, leading to better long-term risk-adjusted returns.
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Consider systematic strategies that aggregate high-conviction holdings from multiple top-performing managers. This reduces single-manager risk while capturing proven alpha sources.
Impact: This approach leverages the "wisdom of the crowd" and can generate consistent outperformance without relying on the subjective judgment of a single individual.
Quotes
“Es ist eine ganz große Lüge der gesamten Fondsindustrie, dass alles, was einen Manager hätte... ein aktiver Fonds wäre.”
“Es ist doch viel besser, du kopierst richtig was Gutes, als irgendwas Neues zu machen, was du gegen die Wand fährst.”
“Wenn du Kacke in Goldfolie packst, bleibt es am Ende auch Kacke.”