Hi Jason, thank you for adding another interesting piece into your The Active Equity Renaissance series.

ACR certainly has a good investment and philosophy and process -- value approach, buy quality bargains for long term, boring but sensible. However, after some examinations on their flagship fund EQR via its fact sheets, I notice few shortcomings of ACR as an active investment manager (I hope I'm not overly cynical).

One of the main observations I found about ACR is that they are "down"-market specialist (as most value investors are). They protected the downside well over the years (outperformed the index 4 out of 4 down years). However, ACR did not do a great job in adding value to investors during the up years. EQR has only outperformed the index (net 1% fees) in 4 out of 14 "up" years since inception. I point this out because investors don't often get into a fund at right timing (often during the up years). An active manager should add value to the otherwise passive investors at most times, if not all times. That being said, smart investors should always knock on ACR's door in any bear market for their speciality in capital protection. (Note: I do understand that value investors are typically bad bull performers, as Seth Klarman once said "I must remind you that value investing is not designed to outperform in a bull market. In a bull market, anyone, with any investment strategy or none at all, can do well, often better than value investors.")

I think ACR is also a victim of larger fund size. EQR had a terrific head start in 2000-2002, gaining 71% vs the index losing 39%. However, since then till today, EQR has slightly underperformed the index (net of fees 9.1% p.a. vs 9.5% index p.a.), mainly due to their inability to add much value during the up years. I'd speculate that the fund has attracted significant sum of inflows after the first few phenomenal years, leading to a too-much-money-to-deploy problem.

ACR brand themselves as an absolute-return investor but I see a meaningful correlation between their performance to the index returns (0.71x beta as per its factsheet). Other than the first 3 years, EQR has been trending in line with the S&P 500. With due respect, I think the objective of absolute return has not been well achieved.

Also, Nicholas mentioned "we combine wide mandates with concentrated portfolios while making sure that we remain fundamentally well diversified." but I do not see a concentrated portfolio via EQR's fact sheet. Its largest position (Microsoft) consists only 6% of the NAV, far from the conventional definition of a concentrated portfolio. If anything, there are certainly some elements of index hugging in the portfolio.

I may be too critical but the reality of the investment world is equally harsh. As Warren Buffett has been preaching all these years, investors are better off investing in index unless the active manager can add meaningful amount of value.