Information Ratios Manager Information Tracking Active Ratio Passive Structured Traditional Error Return Information Assumption Allocation Allocation Allocation (bps) (bps) Ratio Topquartile 38% 44% 18% 100 87 0.87 Median 32 54 14 100 46 0.46 at the 100 basis point tracking error target under our two assumptions for manager information ratios. The results in Table 14.9 are quite interesting. When investors use the median information ratios (i.e., no particular skill in manager selection), the allocation to structured equity increases. Moreover, while the allocation to structured equity is funded out of both the passive and traditional strategies, the impact is more pronounced on the passive program. The assumptions underlying the analysis of Tables 14.5 and 14.6 are that there are differences between structured and traditional managers, and that investors are skilled in manager selection. In Tables 14.8 and 14.9, we assumed that investors are neutral in their abilities to pick managers, but that the differences between structured and traditional managers are expected to continue. The implication for portfolio strategy in both cases is that investors should move away from a barbell strategy and take active risk across the active risk spectrum. They should do so by reducing their passive positions and adding structured active equity programs. There is a final possibility that deserves consideration: Suppose investors believe there are no long-term performance differences between structured and traditional managers and that they are not skilled in manager selection. An easy way to reflect the assumption of no difference between structured and traditional managers is to assume that the median information ratio for all managers is 0.20-that is, approximately halfway between the median information ratios shown in Table 14.1. (Of course, we could have taken a value-weighted average, but the portfolio structuring implication would be the same.) Under this assumption, portfolios of two structured managers and four traditional managers will have information ratios of 0.28 and 0.40, respectively. The optimal information ratio portfolio has 60 percent allocated to the structured program and 40 percent allocated to the traditional program, with an overall tracking error of 184 basis points and an overall information ratio of 0.49. Suppose the total tracking error target is 200 basis points. As in our earlier examples, the allocations to each strategy are driven by risk rather than information ratio considerations. Consequently, 55 percent of the portfolio is allocated to the portfolio of structured strategies and 45 percent is allocated to the portfolio of traditional strategies. Now, let's see what happens at a lower tracking error target. Continuing with our previous examples, suppose the tracking error target is 100 basis points. In this case, the proper strategy is to make allocations to the optimal information ratio portfolio and the passive strategy. The optimal blend is now 46 percent allocated to passive, 32 percent allocated to the structured portfolio, and 22 percent allocated