Read Part 1 >>> Passive Active Ownership Strategy - Part 1 

Use MSCI USA to continue testing passive active ownership strategy: the MSCI USA Index is primarily focused on large and mid-cap stocks. Typically includes around 600-650 companies and the weighting is Float adjusted Market capitalization-weighted, covers all major sectors of the US economy.

–   Version 1 – at each rebalancing multiply the Mcap of each stock with a tilting factor (e.g. capped Z-Scores (+/-3) of all the passive ownership weights translated into 0-1 scalar

–   Version 2 – same as Version 1 but with applying a GICS sector neutrality on each rebalancing together with the tilting.

Use the index itself as one benchmark and a fully equal weighted version as another benchmark.

Rebalances on quarterly basis on the last working day of Feb, May, Aug and Nov, we first test 5 years history.

We recognize that passive ownership percentages can have both positive and negative implications for stock performance. Given that the MSCI USA Index comprises large and mid-cap stocks with high liquidity and broad market coverage, we hypothesized that companies with higher active ownership might benefit from more dynamic trading, potentially leading to better performance.

This analysis tested two tilting strategies based on passive ownership percentages: Passive-held percentage tilted weighting and Inverse passive-held percentage (1 – passive %) tilted weighting. The five-year returns for these strategies, compared to benchmark weightings, were as follows: Passive-held % tilted: 1.994813; Inverse passive-held % tilted: 2.1369403; Market cap weighted (benchmark): 2.075036; Equal weighted: 1.590001Notably, the inverse passive-held percentage tilting strategy outperformed both the passive-held tilting and the traditional market cap weighting. This suggests that, for this index, favoring stocks with higher active ownership may lead to superior returns. The equal-weighted approach significantly underperformed all other strategies.
 

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We further extended our analysis by implementing a sector-neutral approach based on GICS Sectors (Version 2). This strategy aims to maintain the original sector weights while applying our tilting methodologies within each sector. The results of this sector-neutral approach were consistent with our initial findings (Version 1):1. Sector-neutral passive-held % tilted: 2.007315; Sector-neutral inverse passive-held % tilted: 2.130801.

These results demonstrate that the sector-neutral approach maintains the relative outperformance of the inverse passive-held percentage strategy. However, there is a slight damping of outperformance compared to the non-sector-neutral version. The consistency of results across both versions reinforces the potential value of considering active ownership levels in portfolio construction, even when controlling for sector exposures.
 

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Next, we plan to expand our analysis in two key directions: Extended Time Horizon: We will increase the historical analysis period from 5 years to 10 years. 2. Small Cap Focus: We will apply our methodology to the MSCI USA Small Cap Index (106229_MS). This index contains approximately 1,800 constituents, about three times more than the MSCI USA index and it represents smaller companies that may have different ownership dynamics and liquidity profiles.

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