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Factors, Funds and Performance Chasing
Author: Max Pacella | Category: White Paper
In this white paper, we provide empirical evidence for the mean reverting nature of outperformance in both Aussie equities and Aussie fixed income. We also discuss the role of investment styles and market factors in driving manager returns and how understanding these factors can lead to a more comprehensive evaluation of a manager’s true performance.
Alpha, often touted as a measure of investment success, is simply the excess return of a portfolio over its benchmark. However, relying solely on this “naïve alpha” fails to capture the true outperformance of fund managers. Research conducted by Innova reveals that naïve alpha is not persistent and tends to revert to an average over time. This white paper explores the dangers of simply chasing naïve alpha and emphasises the importance of considering market factors and investment styles when evaluating fund performance. By understanding the cyclicality of these factors, investors can make more informed decisions and build robust, long-term portfolios.
For those who have been market participants for the past 15 years, it may have taken some time to adjust to how market reacts to common macroeconomic data prints nowadays. Of course, investors grapple with unique challenges in the world today. Therefore, it’s important that we consider how the dynamics of pricing have also changed… […]
Why robust portfolios deliver better results and keep investors on track. A portfolio built through robust optimisation can deliver one-third higher returns at substantially lower risk than a typical 60:40 growth-defensive portfolio, according to a new Innova analysis. But the key reason for building stronger portfolios has as much to do with investor behaviour as […]
Have you ever pondered the impact of your investments? In an era where sustainable development is becoming increasingly paramount, it’s crucial for investment managers to recognise the role that investing with good conscience can play. Navigating the intricate landscape of responsible investing requires experience, acumen and a steadfast commitment to positive change. Innova Asset Management […]
Reading the title, you’re probably sighing, because let’s be honest every man and their dog has just about written about inflation at this point, and you’re probably sick of it. Before 2021, it was a very foreign idea to have “structural”, high inflation – or even inflation volatility / concerns at all, and now it […]
Advisers protect their clients from a wide range of market risks: inflation, rising rates, illiquidity, currency, business, legislative change, and even their lifestyles. But the biggest risk clients need protecting from may well be their own behaviour. It can be a bitter pill to swallow given clients are often successful people who have accrued above-average […]
What if you told somebody that stocks with lower risk earn a higher return? They may look at you and call you crazy, unless they’re familiar with the “Low Volatility” or “Defensive” factor, which has been very well documented in academic asset pricing literature. Indeed, this absolute paradox exists, that stocks which exhibit low volatility […]
Markets may be offering a way to have your cake and eat it too, so let’s take a look. We have not shied away from calling the US ‘Magnificent 7’ rally into question (see my Ausbiz interview here, our quarterly video’s here and a fairly recent article here), however we have also suggested other areas […]
2023 began with substantial optimism for economies closely intertwined with China’s reopening, particularly in light of the expected relaxation of monetary policy. This optimism stood in stark contrast to the prevailing pessimism of slowing growth and restrictive monetary policy in developed markets, which created a nice narrative. We now know six months later that the […]
Investors are often hounded with phrases related to how a security, or a fund, compares to the market. “High beta” and “low beta” are common, you might also see “upside and downside capture”, and “market neutral” strategies are gaining popularity in the retail advice landscape. But it is worth stepping back for a moment to […]
There’s some funny things are going on in equity markets at the moment I posted a LinkedIn article a few weeks ago (access it here) highlighting that Gross Domestic Income in the US has been negative whilst GDP has been positive, even though they are essentially the same thing. It got a lot of attention […]