A COMMENT ON ACTIVE MANAGEMENT
Robust asset growth in passive portfolios is ascribed to active managers’ inability to earn higher post-fee returns. We have long attributed this to benchmark composition which has overcome the placement of valuation in the make-up of the benchmarks: simply, large firms with strong market shares whose products and services drive superiority of credit, cash flow, and return on capital compared to the investment universe at large. Under similar and reasonable logic, the CT Capital portfolio, whose firms are of higher credit, generate stronger (operating and free) cash flows per investment dollar, with higher return on capital than the benchmarks, should consequently outpace this hurdle rate over the cycle
The growth in “smart beta” products, which has so captured investor and consultant imagination deploys naively constructed metrics, is substantially inferior to the CT Capital worksheets, and would never be considered by credit agencies, bankers, and potential financial acquirers as compelling proof of worth or ability to satisfy claims
