1. The Benefits of Diversified Equity Investing
September 2016
Patricia Halper, CFA

2. Introduction
Q: Do managers with fewer stocks (concentrated portfolios) outperform more diversified managers?
A: Over the last five years, diversified managers performed better than concentrated peers while maintaining lower risk.

3. Active Share measures how different a portfolio is from the benchmark.
One Metric to Evaluate a Portfolio
Active Share measures how different a portfolio is from the benchmark.

4. 0% - The portfolio is the benchmark
Plain English Please…
Active Share:
Number between 0% and 100%
0% - The portfolio is the benchmark
100% - NO overlap between stocks in the portfolio and stocks in the benchmark

5. Russell 2000 Small Cap Stocks
A Few Examples of Active Share
100 %
PORTFOLIO
BENCHMARK
Russell Small Cap Stocks
NO OVERLAP
COMPLETELY DIFFERENT
Russell 1000
Large Cap Stocks

6. Top 10 Stocks of the S&P 500 @ 10% weight
A Few Examples of Active Share
82 %
PORTFOLIO
BENCHMARK
Top 10 Stocks of the S&P 500 @ 10% weight
S&P 500 Index

7. 44 % BENCHMARK PORTFOLIO A Few Examples of Active Share
Exact Same Stocks
Different Weights
Equal Weight S&P 500
Cap Weight S&P 500

8. So, Is Different Better?
Some academics said, “Yes”
In 2009, Martijn Cremers and Antti Petajisto published a paper titled “How Active Is Your Fund Manager? A New Measure That Predicts Performance”
One conclusion: Managers in the top quintile of Active Share outperformed managers with low Active Share.
Active Share caught on and is now a widely popular tool used in the investment community.

9. Sounds Good, Right?
Some issues to consider:
Active Share is a point in time holdings- based measure. Proper analysis needs stock holdings, over time.
What makes the portfolio different? Is the manager sticking to the mandate?
What is the overall risk of the portfolio?

10. So, What’s the Catch?

11. Not So Fast Active Share
Follow-up studies:
AQR found different results when grouping stocks against appropriate measures. Blame it on bad benchmark comparisons. Once corrected, results were random and not significant.1
Fidelity found higher Active Share resulted in higher dispersion and downside risk, and any outperformance was from a small cap bias.2
Update from Petajisto in 2013 – took a closer look at fees. If you pay too much for lower risk, you don’t get net of fee returns.3
1 Frazzini, Friedman and Pomorski, AQR White Paper, April 2015, “Deactivating Active Share”. 2 Cohen, Leite, Nielsen and Browder, Fidelity Investments Investment Insights, February , “Active Share: A Misunderstood Measure in Manager Selection”. 3 Petajisto, Antti, 2013, “Active Share and Mutual Fund Performance,” Financial Analyst Journal, 69 (4), pp

12. What Do We Think?
Chicago Equity Partners did our own work
Utilized data from an institutional manager dataset – not high fee mutual funds
Analyzed portfolios using number of stocks to compare concentrated, “high conviction” managers with diversified peers
Results: We found no associated outperformance for concentrated strategies in recent years

13. Active Large Cap Core Managers (For Periods Ended March 31, 2015)
Results of CEP 2015 White Paper – Large Cap Core
Active Large Cap Core Managers (For Periods Ended March 31, 2015)
# of Stock Holdings
# of Managers
3 Yr Total
Return
5 Yr
Total
3 Yr
Tracking
Error
Tracking Error
Info
Ratio
3 yr
Batting
Avg
Avg # of Stock Holdings
Fewer than 40
123
14.70%
13.19%
3.72
4.13
-0.37
-0.31
46.74%
47.04% 30
41 to 99
200
15.72%
13.63%
2.98
3.25
-0.17
-0.22
48.51%
47.75% 60
More than 100 66
16.81%
14.99%
1.81
1.93
0.51
0.38
55.47%
55.05%
249
Diversified Large Cap managers (with over 100 stocks in their portfolio) in trailing 3- and 5-year periods ending 1Q 2015 had the:
Highest Return
Lowest Risk
Best Risk-Adjusted Returns
Source: Morningstar for US SA Large Cap Blend category. Risk statistics versus Russell 1000 Index. Russell Investment Group is the source and owner of the trademarks, service marks and copyrights related to Russell Indexes. Russell® is a trademark of Russell Investment Group.

14. Results Were Consistent Across Market Cap and Style
3/31/15
# of  Managers
3 Yr Total Return
3 Yr % Rank
5 Yr Total Return
5 Yr % Rank
LCC: <=40 54
15.58 55
14.27
LCC: 41-99
144
16.18 53
14.26
LCC: >=100
106
16.73 38
14.87 39
LCG: <=40
102
15.83 51
15.28 47
LCG: 41-99
163
16.00 52
15.04
LCG: >=100 46
17.28 33
15.78
LCV: <=40
109
15.62
13.59
LCV: 41-99
182
16.07 48
13.69 50
LCV: >=100 59
17.03 36
14.35
SCC: <=60 42
15.11 65
14.77 63
SCC: 73
16.76
15.97
SCC: >=140
18.44 35
17.07
SCG: <=60 45
16.62 58
17.38
SCG:
107
17.39
17.18
SCG: >=140 28
18.51
17.92
SCV: <=60 74
15.46
14.73
SCV:
15.99
SCV: >=140
17.09 41
15.36
Source: eVestment. Average returns and ranks used for respective peer group universes. Rankings shown in percentile.

15. Small Cap Core Managers (For Periods Ended June 30, 2016)
Updated Statistics for Small Cap Show Same Results
Small Cap Core Managers (For Periods Ended June 30, 2016)
# of Stock Holdings
# of Managers
3 Yr Total
Return
5 Yr
Total
3 Yr
Tracking
Error
Tracking Error
Info
Ratio
3 yr
Batting
Avg
Avg # of Stock Holdings
Fewer than 60 44
7.23%
8.87%
5.97
5.83
0.12
0.15
50% 40
61 to 139 66
9.03%
9.82%
4.21
4.11
0.56
0.42
56%
53% 92
More than 140 62
9.25%
10.32%
3.06
2.91
0.74
0.68
57%
405
Diversified Small Cap managers (with over 140 stocks in their portfolio) in trailing 3- and 5-year periods ending 2Q 2016 also had the:
Highest Return
Lowest Risk
Best Risk Adjusted Returns
Source: eVestment Alliance for Small Cap Core Universe. Note: Total Return and Average # of Stock Holdings represent the average of each subset. Tracking Error, Information Ratio, and Batting Average represent the median manager of each subset.

16. Number of Stocks Correlated with Return
3/31/15 Correlations
# of Managers
3 Yr
5 Yr
ALL LCC
304
0.0819
0.0804
ALL LCG
311
0.1337
0.0710
ALL LCV
350
0.0841
0.0529
ALL SCC
168
0.2021
0.1283
ALL SCG
180
0.0680
ALL SCV
230
0.0885
0.0387
The data shows relationship between number of stocks and returns:
Numbers would be negative if concentrated portfolios were associated with positive excess returns (they weren’t!)
Numbers would be positive if diversified portfolios were associated with positive excess returns (they were!)
Source: eVestment Alliance (eA).

17. Single Metric Not Enough
What we think we know
What we need to know

18. Concentrated Small Cap Manager 1 Concentrated Small Cap Manager 2
Examples of Concentrated Managers – Sector Bets
6/30/16
Concentrated Small Cap Manager 1
Concentrated Small Cap Manager 2
Russell Index
# of holdings 18 28
1,959
Active Share
99.6%
98.7%
N/A
Source: eVestment Alliance as of June 30, 2016.

19. Both Concentrated, Very Different Returns
Excess Returns
1Yr
3Yr
5Yr
7Yr
Manager 1
8.25%
-3.42%
-3.55%
-5.26%
Manager 2
13.40%
4.46%
2.57%
3.40%
Source: eVestment Alliance as of June 30, 2016.

20. Diversified Small Cap Manager 3 Diversified Small Cap Manager 4
Examples of Diversified Managers – No Sector Bets
6/30/16
Diversified Small Cap Manager 3
Diversified Small Cap Manager 4
Russell Index
# of holdings
216
606
1,959
Active Share
83.4%
73.8%
N/A
Source: eVestment Alliance as of June 30, 2016.

21. Both Diversified, but Very Different Returns
Excess Returns
1Yr
3Yr
5Yr
7Yr
Manager 3
-0.21%
2.95%
2.56%
2.07%
Manager 4
-0.55%
0.22%
0.16%
Source: eVestment Alliance as of June 30, 2016.

22. Diversified Managers Show Better Risk-Adjusted Return
Concentrated vs. Diversified Small Cap Managers – Rolling 3 Year Information Ratio
The diversified manager has higher Information Ratios in nearly 75% of the observations.
Source: eVestment Alliance. Information Ratio calculated relative to Manager Preferred Benchmark.

23. AND Diversified Managers Average Lower Fees
SCC Group
Average Fee (bps) at $10mm
Average Fee (bps) at $25mm
Average Fee (bps) at $50mm
Average Fee (bps) at $100mm
Fewer than 60 93 90 87 84
More than 140 78 76 73 70
Source: eVestment Alliance as of June 30, 2016.

24. Different is not always better
Summary
Active Share – a tool in your tool box, but need to evaluate portfolios further.
Different is not always better
Benefits of diversified equity portfolios:
No big sector bets
Stick to the mandate
More efficient use of risk
Lower fees

25. How Do I Find Out More?
Go to ChicagoEquityPartners.com to read the full paper
Concentrated vs. Diversified Managers:
Challenging What You Thought You Knew About “High Conviction”

26. Questions?

27. Contact Information
For more information
Chicago Equity Partners
180 N. LaSalle Street, Suite 3800
Chicago, Illinois
Michael L. Nairne p: e:

28. Disclosures Past performance is not indicative of future results.
Chicago Equity Partners, LLC is a registered investment adviser. Prior to April 1, 2000, the firm was a part of Bank of America N.T. and S.A., a wholly owned subsidiary of BankAmerica Corporation. In May 2000, senior management purchased the firm from BankAmerica Corporation and operated as an independent entity until December In December 2006, Affiliated Managers Group, Inc. (NYSE * AMG) purchased a majority equity stake in Chicago Equity Partners, LLC. CEP investment professionals remained with the firm following the AMG purchase. The firm maintains a complete list and description of composites, which is available upon request.
The views expressed reflect the current views as of the date hereof and neither the speaker nor CEP undertakes to advise you of any changes in the views expressed herein. It should not be assumed that the speaker or CEP will make investment recommendations in the future that are consistent with the views expressed herein, or use any or all of the techniques or methods of analysis described herein in managing client accounts. CEP may have positions (long or short) or engage in securities transactions that are not consistent with the information and views expressed in this presentation.
There can be no assurance that an investment strategy will be successful. Historic market trends are not reliable indicators of actual future market behavior or future performance of any particular investment which may differ materially, and should not be relied upon as such. This presentation should not be viewed as a current or past recommendation or a solicitation of an offer to buy or sell any securities or to adopt any investment strategy.
The information in this presentation may contain projections or other forward‐looking statements regarding future events, targets, forecasts or expectations regarding the strategies described herein, and is only current as of the date indicated. There is no assurance that such events or targets will be achieved, and may be significantly different from that shown here. The information in this presentation, including statements concerning financial market trends, is based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons. Performance of all cited indices is calculated on a total return basis with dividends reinvested.
The investment strategy and themes discussed herein may be unsuitable for investors depending on their specific investment objectives and financial situation.