The discipline behind tracking error rises

A rise in tracking error may worry value-driven investors, but it can actually indicate that their strategy is working, by providing diversification and protecting against market downturns. Rising tracking error highlights volatility caused by portfolio managers or within the broader market. Global equity returns have become more concentrated in a few tech companies, with these generating both recent gains and higher benchmark volatility. The market environment is challenging and a reminder of core principles, as buy and yield criteria naturally exclude stocks like the “Magnificent 7.” Tracking...