Q: Why is Ensemble Active Management significant?
A: We believe that Ensemble Active Management (EAM) is the future of active investment management because it is an AI-informed re-imagining of the alpha generation process. EAM uses a "wisdom of experts" approach, with 100% of the portfolio reflecting the consensus high conviction stock picks from top performing managers. EAM blends core investment fundamentals with the best practices of predictive analytics and breakthrough technology.
Q: What are the key problems facing active management returns?
A: Over the last decade active managers have shown a very low probability of outperforming their stated benchmark returns or corresponding index funds after fees. One of the key reasons is that active managers dilute their best ideas by adding additional stocks to their portfolios in order to manage portfolio risk. While this risk management succeeds in reducing the likelihood of what is known as a toxic tail, it creates a performance penalty that has resulted in an outflow from active managers to passive vehicles.
Q: Is EAM the same as a multi-manager approach?
A: No. Multi-manager portfolios (MMPs) improve risk management, but do not generate alpha. MMPs benefit from added diversification at the process level, which reduces tail risk and stabilizes returns. But, the returns of MMPs are always the weighted-average return of the underlying strategies. EAM portfolios are built from predictive forecasts extracted from underlying portfolios, and add alpha due to the improved forecasting ability created by Ensemble Methods. Simply put, EAM delivers the best ideas from top managers in a single portfolio.
Q: Who will benefit from EAM?
A: If EAM results in higher long-term returns, then the ultimate beneficiaries will be the end investors whose long-term investment performance will be improved. This includes retail investors, pension plans, foundations and endowments. Additional beneficiaries will be firms in the business of providing investment advice or products, as they stand to benefit as their clients succeed.
Q: How have other industries achieved success using Ensemble Methods?
A: Multiple industries utilize ensemble methods with the goal of achieving higher levels of predictive accuracy and to solve what are referred to as "glass ceiling" problems. For decades other industries have solved the problem of weak "predictors" by applying Ensemble Methods, with core components that include Artificial Intelligence ("AI") and machine learning to merge many weak predictors into a more effective "multi-expert" predictive engine to increase their success. A good example of the use of Ensemble Methods in another industry is the prediction of hurricane landfalls, where multiple predictive algorithms are combined to create a superior prediction.
Q: How can you explain ensemble methods to a retail investor?
A: Ensemble Methods is a multi-expert approach to investing where 100% of the stocks in a single portfolio reflect the best ideas from top performing managers.
Q: Who is bringing this technology to active management?
A: Our partner, Turing Technology Associates, is the original inventor of Ensemble Active Management (EAM), which is the result of applying time-tested Ensemble Methods technologies and techniques to the high-conviction stock selections of actively managed investment portfolios. What enables the creation of EAM portfolios is Turing's first-of-its-kind database that captures up to a decade's worth of real-time, daily holdings and portfolio weights of actively managed mutual funds. This database currently reflects information from more than $3 trillion in fund assets under management and continues to grow. This daily holdings-based data allows Turing to look inside mutual funds and gain unprecedented insight into the cause and effect of fund managers' decision-making.