Sometimes, you might not realize your biggest portfolio risks until it’s too late.
That’s why it’s important to pay attention to the right market data, analysis, and insights on a daily basis. Being a passive investor puts you at unnecessary risk.When you stay informed on key signals and indicators, you’ll take control of your financial future.
However, the average investor doesn’t have the time or resources to stay informed.
The main topic for this article will be “Alpha Doesn’t Come From Being Up More”.
-The generation of alpha is the purpose of active managers.
-However, alpha is not consistent and tend to be lumpy.
-Evidence suggests that investment professions generate their alpha from being down less during market crises.
The fact that we are in a crisis is self-evident and what is on the investment horizon is unclear. But whatever the future brings, how we act now is the most important. It is often said that history repeats itself and the great economist J. K. Galbraith was able to use the Wall Street Crash of 1929 and the surrounding events to generalize it to the creation of market crises in the future.
With this in mind, we can get a rough idea of how active managers may perform in this current environment. To do this, the total returns of 80 funds and the average of their performance was calculated as a proxy for active management performance. This average was then compared to the S&P 500 from before the subprime crisis until the end of 2019. A graph of this is displayed below.
It can be seen that at the lowest part of the 2008 drawdown, equity active managers were able to outperform, and this cumulative alpha continued for a period after the crisis. However, since that period, the cumulative alpha decayed consistently at a slow rate. To better visualize this, the cumulative alpha is plotted below.
As can be seen, significant alpha was generated during the subprime crisis. The hypothesis that alpha is generated by losing less rather than winning more is highly evident in this event study. The cumulative alpha slightly increased in the recovery, but then can be seen to consistently be reduced.
Will this pattern occur this time around? I think that does depend on a few factors with the primary one unsurprisingly being around how Covid-19 will continue to impact on the world. The news continues to be both good and bad simultaneously. China’s economy rebounded strongly in the second quarter as the serious lockdown was lifted and industry could resume. Shortly thereafter, there was news that there was a return of Covid-19 cases. The Oxford vaccine shows great promise, so there is hope that end of this crisis in sight, but being down less will likely be the way that asset managers generate their alpha again.
If you would like to explore some of our Alpha Strategies email us at info@crosspointwealth.com
Until Next Time…
