Tracking error underestimated: Assenagon study shows importance of relative risk in equity strategies

• Simulation analysis shows: Relative risk is an underestimated success factor, even with a very long investment horizon
• High relative risks are rarely rewarded in practice
• Active fund management and the consideration of relative risks are not mutually exclusive

Investors traditionally attach great importance to the absolute risk of investment portfolios. The focus here is on key figures such as volatility or the maximum price loss. However, a new analysis by the independent asset manager Assenagon shows that The decisive levers for long-term investment success often lie in relative risk, which refers to the deviation of one's own share allocation from the benchmark, i.e. the selected comparative index.

"Terms such as tracking error, active share or relative price loss are surprisingly rarely included in the discussion about equity risks - yet they are essential for a well-founded allocation decision," says Daniel Jakubowski, Head of Equity Portfolio Management at Assenagon.

In a comprehensive simulation analysis, Daniel Jakubowski, together with his colleague Dr. Ulrich Wessels, Director Institutional Sales at Assenagon, examined how different levels of relative risk affect the long-term performance of actively managed equity strategies. Tracking error measures the extent to which the performance of an actively managed portfolio deviates from the performance of a comparative benchmark.

"High relative risks are usually not rewarded"

The model calculations by Jakubowski and Dr. Wessels show that Assuming a guaranteed long-term outperformance of 1.5 percent p. a., strategies with a tracking error of 2 percent p. a. show an excess return over the market after ten years in almost all cases. With a tracking error of 10 percent, more than a third of all strategies underperform the market after ten years, despite the generous assumption of guaranteed outperformance.

These results are underpinned by an analysis of global value strategies in practice, with a remarkable correlation: "The higher the relative risk, the lower the actual return achieved. Our simulations show that high relative risks are rarely rewarded in the long term," says Dr. Wessels. However, it is important to note that a well-managed relative risk profile in no way excludes portfolio activity: active shares, i.e. the percentage deviation of the portfolio allocation from the benchmark, of 80 percent can easily be implemented with a tracking error of less than 5 percent, both experts agree. The Assenagon specialists therefore advocate a more differentiated view of relative risk - not only as a risk management tool in the area of passive investments, but also in the context of actively managed strategies in particular. You can read the detailed analysis in the latest issue of Assenagon Equity Insights.

Munich, May 15, 2025