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Trending: Top Three Emerging Markets Equity Funds
Daniel Cross
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These funds specifically invest in emerging market economies with the largest being China...
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Fund | Average Annual Return (%) | Annualized Alpha (%) |
---|---|---|
All Funds | 7.00% | -0.50% |
Best 5% of Funds | 6.90% | 3.70% |
Worst 5% of Funds | 6.80% | -3.00% |
Best - Worst | 0.10% | 6.70% |
S&P 500 Index | 6.10% | - |
The fact that all three portfolios have higher returns than the S&P 500 can be explained by the fact that from 2000 through 2014, small and value stocks outperformed the S&P 500 by fairly wide margins. For example, using MSCI indexes, while the S&P 500 returned 4.4%, small caps returned 9.4%, small value stocks returned 11.2% and large value stocks returned 6.6%. Since the study equally weights funds, these returns do not represent the experience of the average investor.
A third puzzling result is that the average annual return difference between the best 5% and the worst 5% of funds is only 10 basis points, even though the corresponding difference in annualized alphas is 6.7%. Ranking funds on alpha from their daily return regressions produced virtually no dispersion in average return. If an investor’s objective is to identify funds with high expected returns, the methodology employed here doesn’t seem to accomplish that objective.
Factor models are valuable tools. They are so important because they allow investors to identify the sources of returns of a portfolio/fund and also to determine if there is residual alpha after adjusting for a fund’s exposure to common factors. However, factor models can be abused in the same way that a racing car can be abused.
The results of this study provide an excellent example of why it’s important to not misuse factor models. In making any portfolio construction decisions, investors should consider not just whether a fund is generating alpha, but also the fund’s exposure to various factors. In the case of the study by Jordan and Riley, we saw that while the stock-picking skills of the top 5% of performers allowed them to generate significant alphas, investors didn’t benefit in the form of higher returns. This is because the benefits derived from their skill were offset by the negative loadings on factors with positive returns.
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News
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These funds specifically invest in emerging market economies with the largest being China...
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Find out why $30 trillon is invested in mutual funds.
Download our free report
Find out why $30 trillon is invested in mutual funds.
Download our free report
Find out why $30 trillon is invested in mutual funds.
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Fund | Average Annual Return (%) | Annualized Alpha (%) |
---|---|---|
All Funds | 7.00% | -0.50% |
Best 5% of Funds | 6.90% | 3.70% |
Worst 5% of Funds | 6.80% | -3.00% |
Best - Worst | 0.10% | 6.70% |
S&P 500 Index | 6.10% | - |
The fact that all three portfolios have higher returns than the S&P 500 can be explained by the fact that from 2000 through 2014, small and value stocks outperformed the S&P 500 by fairly wide margins. For example, using MSCI indexes, while the S&P 500 returned 4.4%, small caps returned 9.4%, small value stocks returned 11.2% and large value stocks returned 6.6%. Since the study equally weights funds, these returns do not represent the experience of the average investor.
A third puzzling result is that the average annual return difference between the best 5% and the worst 5% of funds is only 10 basis points, even though the corresponding difference in annualized alphas is 6.7%. Ranking funds on alpha from their daily return regressions produced virtually no dispersion in average return. If an investor’s objective is to identify funds with high expected returns, the methodology employed here doesn’t seem to accomplish that objective.
Factor models are valuable tools. They are so important because they allow investors to identify the sources of returns of a portfolio/fund and also to determine if there is residual alpha after adjusting for a fund’s exposure to common factors. However, factor models can be abused in the same way that a racing car can be abused.
The results of this study provide an excellent example of why it’s important to not misuse factor models. In making any portfolio construction decisions, investors should consider not just whether a fund is generating alpha, but also the fund’s exposure to various factors. In the case of the study by Jordan and Riley, we saw that while the stock-picking skills of the top 5% of performers allowed them to generate significant alphas, investors didn’t benefit in the form of higher returns. This is because the benefits derived from their skill were offset by the negative loadings on factors with positive returns.
Receive email updates about best performers, news, CE accredited webcasts and more.
News
Daniel Cross
|
These funds specifically invest in emerging market economies with the largest being China...
Jayden Sangha
|
In this article, we will take a closer look at the upcoming initiatives...
Kristan Wojnar, RCC™
|
This week we are tackling the practice management topics of a client-centric approach,...
Find out why $30 trillon is invested in mutual funds.
Download our free report
Find out why $30 trillon is invested in mutual funds.
Download our free report
Find out why $30 trillon is invested in mutual funds.
Mutual Fund Education
Justin Kuepper
|
Let's take a closer look at how ESG investments have outperformed during the...
Mutual Fund Education
Daniel Cross
|
While CITs and mutual funds share many similarities, there are some key differences...
Mutual Fund Education
Sam Bourgi
|
The phrase ‘bear market’ has been thrown around a lot lately, but it...