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beta portfolio would be for those portfolio managers who may be seeking a smart beta approach for their U.S. large-cap growth portfolio (in lieu of or in addition to VUG, Russell 1000 Growth Index, or S&P 500 Growth Index). 65 As the last endnote indicated, the founder-CEO index has a 66% weight in the IT, Consumer Discretionary, and Health Care sectors. In contrast, the S&P 500 only has 49% weight in the same sectors. The most efficient smart beta opportunity with the founder-CEO index is with the VUG or Russell 1000 Growth because of similarities in the sector composition (66% for founder-CEO and for VUG, 69% for Russell 1000 Growth, and 68% for S&P 500 Growth). 66 Because the founder-CEO index has a growth and sector bias (e.g., Consumer Discretionary, IT), the fund man- ager should decide whether or not market conditions favor growth or the founder-CEO sector bias. In the event the fund manager chooses a passive path, without preference, the implied risk assumption will be that the portfolio will succeed during market conditions that favor growth (and sector prefer- ences) and underperform during periods of value or whenever sectors diverge from founder-CEO patterns (e.g., Utilities, Materials, Industrials). Over an extended period of time, it appears that the decision to overweight a founder-CEO index generates excess returns, but again, this presumes that periods going forward will be similar to the 2006–2015 period. If the fund manager holds a basket of the individual securities, the most effective path for minimizing tracking error to the bench- mark would be to eliminate purchases in the IT, Consumer Discretionary, and Health Care sectors and replace them with the founder-CEO basket. Otherwise, the higher weights in those three sectors would create significant tracking error risk. 67 As added support, at least one active fund manager, EntrepreneurShares, LLC, uses the founder-CEO index in implementing its active fund strategy. This passive variable, coupled with other proprietary factors, enables it to achieve its fund performance. 68 Solactive and EntrepreneurShares, LLC both supply founder-CEO indexes and investment strategies associated with them. 69 Clearly, some investment managers may choose to eschew the smart beta portfolio approach and simply invest in a concentrated set of founder-CEO stocks for an extended period of time. Such an approach obviously embraces more risk than a diversified smart beta portfolio, although it poten- tially rewards the investor with superior risk-adjusted returns over the prevailing time period.
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REFERENCES
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