Multi-manager investing: Good portfolio management or closet indexing?

Thoughtfully combining differentiated active managers can reduce manager-specific risk and volatility while improving the efficiency, consistency and compounding of excess returns.

• Russell Investments analyzed 128 U.S. small-cap managers over the 10 years ended March 31, 2026, using 5,000 simulation paths and assuming no ability to identify future winners.
• The probability of positive 10-year excess returns rose from 48% with one manager to 72% with three managers and 81% with six, even as Active Share declined.
• The multi-manager portfolios generated higher median excess returns, lower Tracking Error, stronger Information Ratios and a greater likelihood of positive cumulative excess returns than the single-manager simulation.
• Combining two uncorrelated return streams reduced volatility from 30.3% to 21.4%; with similar arithmetic return expectations, annualized compounded return rose from 5.6% to 8.0% and terminal wealth from 2.96× to 4.68%.
• Active Share measures holdings differences from a benchmark and Tracking Error measures benchmark-relative volatility, but neither shows how efficiently active risks are combined or whether return sources are genuinely differentiated.

Takeaway: Advisors should judge multi-manager portfolios by risk-adjusted returns, drawdowns, compounding and the probability of positive excess returns rather than by Active Share or Tracking Error alone; the benefits depend on combining managers with imperfectly correlated sources of active return.