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Published byMiles Wood Modified over 9 years ago
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The A,B & C of Returns
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A : Alpha B : Beta C : Gamma
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BETA GAMMA ALPHA Breaking Down Returns Uncertain Certain
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B: Beta
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1.Costs erode investment returns 2.To be an investor not a speculator 3.The arithmetic of active management 1 2 3
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1. Costs Erode Investment Returns 1
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The Gotrocks parable..
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Taxes Total Cost Behavioral Structural Source: Rick Ferri, 3 Costs Investors Must Control
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Fund Expense RatioTime Weighted Return Low9.22% 28.85% 38.35% 47.84% High6.88% Source: Timing Poorly: A Guide to Generating Poor Returns While Investing in Successful Strategies by Jason Hsu, Brett Myers and Ryan Whitby. Rick Ferri ‘3 costs and investor must control’. Structural Table 1: US Equity Mutual Fund Returns Sorted by Fund Expenses 1991-2013
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Behavioral Fund Expense Ratio Dollar Weighted Return Time Weighted Return Difference Low7.88%9.22%-1.34% 26.93%8.85%-1.92% 36.07%8.35%-2.28% 44.80%7.84%-3.04% High2.87%6.88%-4.01% Source: Timing Poorly: A Guide to Generating Poor Returns While Investing in Successful Strategies by Jason Hsu, Brett Myers and Ryan Whitby. Rick Ferri ‘3 costs investors must control’. Table 2: US Equity Mutual Fund Returns Sorted by Fund Expenses 1991-2013
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2. Investing not speculating 2
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Source: John Bogle's Keynote Speech – The Money Show - What's Ahead for Stocks and Bonds - And How to Earn Your Fair Share, May 15, 2006 Investment Return Versus Market Return
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3. Playing the winners game 3
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Weighted Average Return of the Market for Any Given Period PASSIVEACTIVE < 0.3% 1% + WINNERLOSER
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C: What is Gamma?
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C : Gamma Tax : Asset Allocation / Withdrawal Asset Allocation : Risk preference vs. Risk capacity Annuity Allocation : Hedge Dynamic Withdrawal Strategy : Revisit assumptions Match liabilities with investment strategies 1234 5
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A: Alpha
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BETA GAMMA ALPHA Smart Beta / Factor Based Investing Pure Manager Skill Alpha
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Smart Beta “Severing index weighting from price” “Price weighting the “Achilles heal” of Market Cap Index” Rob Arnott, founder of RAFI
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Breaking Down the Factors: Source: Goldman Sachs For illustrative purposes only MarketValueVolatilityMomentumSizeQuality Return Drivers of Equity Markets Co-movement with the overall equity market (beta) Relatively cheap stocks outperform expensive ones Low risk stocks tend to outperform high risk stocks over the long term Capture of trends and patterns in the market Small cap stocks tend to outperform large cap stocks Companies with high and sustainable profitability outperform
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Smart Beta: 2015 Global Survey (Russell) Which Best Describes Your Organization’s Usage of Smart Beta Strategies? What % of Your Organization’s Equity Portfolio is Invested in Smart Beta Strategies? 67% 47% 41% 32% 31% What Smart Beta Strategies Have You Evaluated or Are You Currently Evaluating? Low volatility Multi-factor combination FundamentalValue Minimum variance Equal weight 1 2 3 Source: Smart beta: 2015 global survey findings from asset owners (1) 214 asset Owners. Sample size for $10B+ for Europe is 19 and below preferred threshold of 30 (2)Segment: Participants who have smart beta allocation (3)Segment: Participants Have smart beta allocation, Evaluated and decided not to implement or Currently evaluating smart beta
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Low-Volatility Portfolios Performance
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Low Volatility Anomaly Hypothesis Leverage aversion Lotteries Delegated Agency Model Analyst Optimism All of these seem to suggest that the performance advantage of low volatility stocks are robust and potentially hard to eliminate 1 23 4
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In Summary Keep costs low Bank on Beta Far more to financial advice than the pursuit of Alpha Factor Indices Active strategies: commoditized Reliable, consistent and low cost
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Thank You, Questions?
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This document and any other information supplied in connection with CoreShares Index Tracker Managers (RF) (Pty) Ltd (“the Manager”) is not “advice” as defined and/or contemplated in terms of the Financial Advisory and Intermediary Services Act, 37 of 2002 (“the FAIS Act”) and investors are encouraged to obtain their own independent advice prior to buying participatory interests in CIS portfolios issued by the Manager. Opinions expressed in this document may be changed without notice at any time after publication. Collective Investment Schemes (CIS) are generally medium to long-term investments. The value of participatory interests or the investment may go down as well as up. Past performance is not necessarily a guide to the future. CIS are traded at ruling prices and can engage in borrowing and scrip lending. A schedule of fees and charges and maximum commissions is available on request from the Manager. Exchange Traded Funds (ETFs) that are registered as Collective Investment Schemes (CIS) are portfolios that trade on stock exchanges. Trading in ETFs will incur the normal costs associated with listed securities, including brokerage, settlement costs, Securities Transfer Tax, other statutory costs and administrative costs. The price at which ETFs trade on an Exchange may differ from the NAV price published at the close of the trading day, because of intra-day price movements in the value of the constituent basket of securities. Grindrod Bank Limited is an Authorised Financial Services Provider and a Registered Credit Provider (NCRCP25). Disclaimer
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