Professional Finance people no better than amateurs

cloud_dog

darkpool wrote: »

Thanks for another valuable input cloud dog

I think we both know that the conversation with SpreadMisrepresentasionsWhereICan is going nowhere. You could answer him if you want?

Darkpoo, the reason I'm so enthralled by the question is that......... You have hooked on to the publication figure of 1.9% Alpha, repeatedly using it to blindly show it reinforces your position.

And yet, significantly, when someone posts a question which may show that an alpha value may not be as absolute as you desperately want it to be you squirm around with your typical evasive bluster.

So, please answer the question..........

Or at least have the ba**s to admit that an alpha may not necessarily be representative of absolute performance.

Come on give a little bit back to the forum.

Lokolo

jem16 wrote: »

Rewired - do feel free to thank darkpool for his adnission.

Ha I am glad I'm not the only one that has noticed rewired thanking all of his posts!

HelpWhereIcan

Ok, sorry for my part in dragging this out folks but, as I said, I did not want to be accused of putting words in darkpool's mouth. I really did think he would just answer if I slimmed down what I was looking for.

It has taken darkpool so long to answer - even tacitly - the figures have been updated but anyway, the benchmark returned 73.7.

The two funds involved returned:

HSBC FTSE All Share Index Tracker (3 Year Alpha of -1.19) : 73.4 which is 0.3 less than the benchmark.

http://www.trustnet.com/Factsheets/Factsheet.aspx?fundCode=CPUKI&univ=O&pagetype=performance

Stan Life Inv UK Equity High Alpha (3 Year Alpha of 3.67): 145.7 which is 72 more than the benchmark

http://www.trustnet.com/Factsheets/Factsheet.aspx?fundCode=HYIAI&univ=O&pagetype=performance

Why?

Because alpha is, essentially, normally risk adjusted.

The alpha is judged against the risk the fund represents to achieve the growth. The Standard Life is more risky (as you can tell from the technical jargon I tried to bamboozle people with - the beta and volatility) so the fund manager is expected to return more to be seen to offer value - alpha.

In other words, the alpha does not always tell you what the actual return is just the excess return above that expected for the risk taken.

darkpool (and most people) take one factor into account - the performance of a basket of shares or benchmark.

Many studies use a calculation of alpha called the Unconditional Fama French model.

This takes 3 factors into account - not just theperformance of the FTSE, S&P or whatever. It also adds in a weighting for Small Cap risk and another for the book-to-market risk. In other words, while it corrects many of what people see as the errors of the Capital Asset Pricing Model (CAPM), it can be argued that it makes it harder for any fund (Trackers included) to achieve a positive alpha - no matter whether it out performs the benchmark in absolute terms or not.

The study quoted goes one step further and uses the Carhart Model which adds a fourth factor - the difference in return between a portfolio of past winners and a portfolio of past losers.

Again, this makes it harder for fund to achieve a positive alpha but this does not directly tell us anything about the actual returns.

There have been people who criticize the academic models for 'false' non zero alphas so nothing is perfect.

Standard Fama-French and Carhart models produce economically and statistically significant nonzero alphas even for passive benchmark indices such as the S&P 500 and Russell 2000. The alphas arise from the disproportionate weight the Fama-French factors place on small value stocks which have performed well, and from the CRSP value-weighted market index which is a downward-biased benchmark for U.S. stocks.

http://www2.lse.ac.uk/fmg/documents/events/conferences/2008/assetPricing/1080_A_Petajisto.pdf

That does not make them bad models or the study a bad one - it just means you need to understand how the alpha is being calculated to understand just what that 70% and 1.9% mean in real terms for real investors.

Many of the funds that study calculated as having zero or slightly negative alpha will have outperformed Trackers in absolute terms; not least because some of the Trackers will have had negative alphas too - as the funds did above.

A third, Active, fund using the same benchmark with a negative alpha:

Schroder Recovery (3 Year Alpha of -0.77) achieved 92.4 - the risk it took do that meant the alpha calculated was negative.

The funds that use the same benchmark - IMA UK All Companies - are on TrustNet.

it does not take long to see that some funds with negative or low alphas have performed better then you may think while those with higher have done less well than you might think.

Alpha is just one thing, charges is another, beta another, volatility another, risk rating, fund manager history etc etc

The study does back Passive Investing, many IFAs are convinced by the Passive argument; it's just not as black and white as darkpool suggests.

IFAs can help you see through all the jargon. They can also help you avoid making costly mistakes or assumptions.

They may use Passive or Active funds, they may use cash.

They do not work for free, and will not always get it right (I don't), but most are trying to do the best they can for their clients.

gadgetmind

HelpWhereIcan wrote: »

The study does back Passive Investing, many IFAs are convinced by the Passive argument; it's just not as black and white as darkpool suggests.

I don't think that passive is better than active, but passive after fees does seem to beat active after fees. As the future threatens to have even lower returns than recent decades, lower fees will be critical.

I'm using mostly passive but active in areas where there is evidence that it can add value.

They may use Passive or Active funds, they may use cash

Not in my (admittedly limited) experience. My (ex) IFA took his bat and ball home at the merest suggestion of a lower cost platform, trackers rather than funds, and fees rather than commission.

He won't be getting > £3k in trail off me next year. I'm sure he won't miss it, nor I him.

Money_Saving_Dude

HelpWhereIcan wrote: »

Which fund returned the most after 3 years...

Three years? Who cares about three years? More to the point, what about 20 years? That's what matters. And the answer? Trackers -- ie the whole market.

HelpWhereIcan

Money_Saving_Dude wrote: »

Three years? Who cares about three years? More to the point, what about 20 years? That's what matters. And the answer? Trackers -- ie the whole market.

:doh:3 Years chosen because that is the longest Trustnet makes alpha figures available for on their website.

The point remains the same. The alpha statistic (that darkpool and many hang their whole dismissal of active management on) does not tell you what the actual returns are - whether it is 3 years or 30 years you are looking at.

dunstonh

Money_Saving_Dude wrote: »

Three years? Who cares about three years? More to the point, what about 20 years? That's what matters. And the answer? Trackers -- ie the whole market.

only if you assume lazy investing. And for lazy investors tracker funds or portfolio funds are the best option.

However, for active investors who will move the funds around with the changes in the economy and to suit their current investment objectives will change that.

Money_Saving_Dude

dunstonh wrote: »

only if you assume lazy investing. And for lazy investors tracker funds or portfolio funds are the best option.

However, for active investors who will move the funds around with the changes in the economy and to suit their current investment objectives will change that.

ok, so I happen at the moment to be re-reading Smarter Investing (Tim Hale). He repeatedly and comprehensively posits that active investment is for mugs -- if you are in it for 20 years. So 'lazy' investing is both inaccurate and pejorative; you could just as equally use the adjective 'smarter.'

The evidence -- at least as presented by Tim Hale -- is over 20 years (indeed over much less than this) active investors don't beat passive ones.

So my view is simple -- throw away your money if you wish. But if you want to make the most out of your money, use only trackers, and use them for 20 years.

brasso

Money_Saving_Dude wrote: »

ok, so I happen at the moment to be re-reading Smarter Investing (Tim Hale). He repeatedly and comprehensively posits that active investment is for mugs -- if you are in it for 20 years. So 'lazy' investing is both inaccurate and pejorative; you could just as equally use the adjective 'smarter.'

The evidence -- at least as presented by Tim Hale -- is over 20 years (indeed over much less than this) active investors don't beat passive ones.

So my view is simple -- throw away your money if you wish. But if you want to make the most out of your money, use only trackers, and use them for 20 years.

I also read the Tim Hale book recently, and find it convincing.

In fairness, what he says is not that active investors don't beat passive ones, but that they generally don't. Some will succeed in beating the market but it's impossible to see this in advance, and by the time you conclude that this fund manager is actually talented rather than fortunate, he tends to have retired or moved onto another fund. And that therefore, the rational choice is to stick with trackers, where a random tracker is shown to beat a random fund manager almost all the time -- over an extended period.

Great book, and should be read by all IFAs and new investors.

darkpool

dunstonh wrote: »

only if you assume lazy investing. And for lazy investors tracker funds or portfolio funds are the best option.

However, for active investors who will move the funds around with the changes in the economy and to suit their current investment objectives will change that.

sorry, what point are you making?