Professional Finance people no better than amateurs

darkpool

jem16 wrote: »

So a negative alpha means that the fund doesn't beat the index after costs according to what you are saying.

Please explain the following then.

Schroder Recovery

Alpha over 3 years = -0.77 ( ie negative 0.77)

Index = FTSE All Share = 75.0% ( 3 yrs)
Index = UK All Companies = 73.7% (3yrs)

Schroder Recover = 91.8% (3yrs)

All data from Trustnet which shows returns after all costs.

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

well, ehhhmmm, i don't like to ask such an obvious question, but why are you comparing a recovery fund over the general market over a three year period?

with respect, if we were living 500 years ago i'd imagine you'd be insisting the earth was flat and if you sailed too far you would fall over the side.

jem16

darkpool wrote: »

well, ehhhmmm, i don't like to ask such an obvious question, but why are you comparing a recovery fund over the general market over a three year period?

Oh so we're selecting time periods and funds to suit our understanding of alpha are we?

Answer the question I asked. Or don't you know the answer?

with respect, if we were living 500 years ago i'd imagine you'd be insisting the earth was flat and if you sailed too far you would fall over the side.

Oh my gosh! Is it really not flat?!

Next you'll be telling me that passive investors don't follow a buy and hold strategy that follows the index.

What is this World coming to?

dunstonh

i also have the advantage that i don't hold some of the dodgier companies on the ftse 100.

So you do believe in active management then.

Reactor_2

jem16 wrote: »

So a negative alpha means that the fund doesn't beat the index after costs according to what you are saying.

Please explain the following then.

Schroder Recovery

Alpha over 3 years = -0.77 ( ie negative 0.77)

Index = FTSE All Share = 75.0% ( 3 yrs)
Index = UK All Companies = 73.7% (3yrs)

Schroder Recover = 91.8% (3yrs)

All data from Trustnet which shows returns after all costs.

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

The reason how the Schroder's fund has beaten the market, even though it has a negative alpha, is because it's beta is more than 1 and you are looking at period when the market has ended higher than when it started.

If the period was where the market ended lower than where it started, the Schroder's fund would be lower than the market.

The apha should be close to zero for this fund, as the return can be explained through beta, so why isn't it? I know the answer, but I want to see if either of you two do.

IronWolf

I don't think it's a contradiction to think it is better to invest in trackers rather than professionally managed funds, while at the same time investing yourself in individual shares.

Firstly, I do believe it is possible to beat the market, as anyone that invests themself must believe, even in mature markets like the US or UK.

But I don't think it follows that managed funds are a good place to invest. Firstly even if you have a very good fund manager, the funds he is managing are likely to be very large which is a drag on performance. As an individual invester I can invest in a wider variety of small companies, which gives me an edge as they are usually the ones with better growth prospects and more value opportunities due to lower analysts coverage. It also allows me to enter an exit positions in seconds, fund managers take weeks to enter and liquidate positions.

Also, fund managers are more likely to TRY and partly track an index, rather than maximise returns. The reason for this is that the fund management industry is highly competitive and full of investors that scare easily. A fund manager wont risk a quarter of poor performance compared to the index, even if it means over 5 years he will beat it. Poor performance for even a quarter can lead to large withdrawls of investors money which greatly reduces his pay package, so its much better to try and follow the market which is rather simple as indexes are dominated by the super-caps anyway.

The result of the above is that they lag the index overall because of the fees, and they are not differentiated enough from the index to perform above it.

And perhaps the largest factor is that managed funds are almost always 95%+ invested in the stock market, even when it doesn't make sense. As an individual investor I can choose to hold 40% in cash if I wish, or if I cant find enough stocks I like, and then bide my time until valuations are more attractive. A fund manager cannot do this as there would be investor backlash. People put money into these funds to be invested, not to sit in cash while the manager waits. That means a manager is forced to buy shares he may not believe provide good value, he just cant find anything better.

The above just applies to private management vs professional, obviously not tracker vs professional though.

For disclosure: I manage my own US and UK positions, but have invested in an emerging markets fund, rather than a tracker. I dont believe the index in these kind of markets is necessarily put together perfectly and the fund I invested in I believe did beat it with talent rather than luck, but I accept the risk that I could be wrong on that.

jem16

Reactor wrote: »

The reason how the Schroder's fund has beaten the market, even though it has a negative alpha, is because it's beta is more than 1 and you are looking at period when the market has ended higher than when it started.

I can only go on the current alpha and beta for this fund.

Over 3 years beta is now 1.10 meaning with the volatility of this fund return would have been 80.52% Instead it has been 67.9%. So according to its beta the fund should have had a higher return of 19.52% but only managed a return of 6.9% higher therefore a negative alpha although still beating the index.

What I am lost with is how this translates to an alpha of -1.1%. The negative bit is fine but it's the percentage bit I can't figure out.

If the period was where the market ended lower than where it started, the Schroder's fund would be lower than the market.

Agreed.

The apha should be close to zero for this fund, as the return can be explained through beta, so why isn't it?

I've explained it as far as I understand it but would appreciate some help in the final calculation.