How to Recognize Alpha Potential in Active Equity Portfolios

Active equity managers are under pressure as concentrated markets and volatile style shifts make it harder to beat benchmarks. This research argues that tracking error is not a reliable sign of skill, since managers taking the most benchmark risk often struggled to outperform.

A better signal appears to be the information ratio, which measures how efficiently a manager turns active risk into excess return. Lower tracking error portfolios with stronger information ratios showed more consistent results over time, especially for core equity allocations where investors want steadier performance.

For advisors and investors, the message is clear: look beyond bold benchmark departures and focus on repeatable processes built on fundamental insight and disciplined risk control. High-conviction active strategies can still add value, but the strongest candidates may be those that pursue alpha more efficiently rather than more aggressively.