Issue link: https://resources.envestnet.com/i/1528379
6 3.3 | Active or Passive Classification Through Time As noted in section 3.2, our initial analysis of the proportion of positive alpha managers in each category was based on averaging manager returns across the entire time period. Thus, the results are an average of these proportions over time, and although they are useful in summarizing the results, they necessarily gloss over the trends that exist in these proportions across time. Importantly, the results might not give us an up-to- date picture of the latest category trends. In this section we discuss the results of time-trend analysis of the proportion of positive alpha managers, using the methodology described in section 2.3. Table 3 shows the results for time-trend analysis, a key component of our updated research in this white-paper, which presents a current snapshot of the positive and negative alpha manager proportions in their respective categories. In particular columns four and five (denoted by "CUR" for "current") give the most recent values, based on rolling-period analysis, for manager failure/success rates (MFR/MSR). For ease of reference, we also have listed the latest average results from Table 2 in columns one through three (denoted by "AVG"). The "Potential Change" column in Table 3 (column six) uses the criteria from the time-average results (see section 2.2 as well as Table 2) to indicate what the "active," "passive," or "neutral" moniker would be when using the most recent time results (columns four and five). In the last six columns we present the change in the proportion of positive and negative alpha managers based on evaluating only the currently alive managers' most recent three-, five-, and ten-year intervals for all the categories in our study. These columns highlight the dynamics of changes in the positive/negative alpha manager proportions through time. For example, to calculate the proportion of positive alpha managers three years ago in, say, the Large Cap Growth category, we would take the current value for this category (9) and subtract the 3-year change in the positive alpha managers (-17), giving us the proportion of 26. Thus, the LCG category has experienced significant decrease in the positive alpha manager proportion (26 to the current 9 percent) over the last three years. Logically, the proportion of negative alpha managers for this category has experienced similar-size increase (19 percent), which means that three years ago the negative alpha manager proportion in Large Cap Growth was about 64 percent (83 - 19). The current value of the positive/negative manager alpha proportions along with their time trends give us powerful insights into the past dynamics of these variables, which could inform our future estimates for these values. Using the most recent time period, rather than the time-average results, sheds additional light on the latest performance of active managers in a particular category. As presented in Table 3, classifications based on the most recent time-trend analysis would result in switching the "active," "passive," or "neutral" moniker in half the categories in Table 2—those built on time-average results. This highlights fairly significant changes in the proportion of the positive and negative alpha managers through time in multiple categories. These results are reinforced by complementing them with the recent trend information given in the last six columns of Table 3. This analysis reveals, for example, that active managers in domestic Small Cap category have FOR ONE-ON-ONE-USE WITH A CLIENT'S FINANCIAL ADVISOR ONLY © 2022 Envestnet. All rights reserved.