Literature Category: Total

For Advisor Use Only - Understanding the dimensions of risk is critical to both constructing a portfolio and evaluating managers. The goal of this research brief is to provide a deeper understanding of one particular dimension of portfolio risk: tracking error.

The goals of this research paper are several: first, to measure the statistical significance of every percentile in the cross-sectional (i.e., across a given Morningstar category) distribution of alphas; second, to use the statistical significance percentile data to designate particular Morningstar categories as candidates for either active or passive management; and third, to conduct predictive analysis along several dimensions to formulate an a priori decision rule for selecting funds with the highest probability of future outperformance.

What is the best approach to asset management: active or passive? We believe that neither strategy is "best"--but an appropriate blend of active and passive strategies can help to deliver the best of both worlds. Envestnet | PMC's ActivePassive Portfolios provide what we believe is an ideal combination of active and passive investment strategies, pairing actively managed mutual funds with low-cost, tax-efficient index funds.

Combining the legacy of investment management at American Funds® with the research, portfolio consulting and management experience of Envestnet | PMC, the Active Core Portfolios are constructed around the philosophy of selecting a core group of active managers to achieve potentially superior long-term results. Whether to manage near-term assets or grow retirement funds, these portfolios may be appropriate for a variety of investor objectives and risk profiles.