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Nov 26 2009 00:00

INVESTORS BY THEIR very nature want to choose the best unit trusts or manager who can add alpha. This particular issue looks at whether value-based investing or specialist small cap investing can provide a better chance of capturing alpha. And if those areas of the market offer excess return can they not simply be captured in new generation products, such as fundamental indices or smart beta at much lower cost than active equity managers charge?

Myth-busters

In the next issue...

Nov 26 2009 00:00

THE TOPIC FOR OUR next issue is "The value chain in investment decision-making - who should really be doing what on behalf of trustees?" The roles of different players in the value chain have evolved considerably over the past few years. Currently, there's considerable debate about how investment decisions by fiduciaries of pension fund assets should be made.

Myth-busters

Winning the loser's game

Nov 26 2009 00:00

IN 1976 THE FIRST FUND designed to track the S&P500 index was launched. Since then, the growth in tracker funds and other passive vehicles designed to match, rather than beat, market performance has been exponential. To a large extent, investors' attraction to passive investing is explained as most active managers fail to beat the market. As graph 1 shows, in a study of United States-based equity managers, most actively managed funds failed to beat the benchmark between 2003 and 2008, regardless of whether performance was measured over one, three or five years.

Myth-busters

The systematic alpha paradox

Nov 26 2009 00:00

"EXPLAIN YOUR ALPHA." A typical question in manager selection due diligence questionnaires. Usually phrased as "please describe the market inefficiencies you have identified, how your investment process exploits those and why you believe those inefficiencies will persist into the future". But what exactly is alpha? And beta? And once those are defined how do you measure skill?

Myth-busters

Returning to simple values

Nov 26 2009 00:00

THE EQUITY RISK PREMIUM has been hotly debated for many years. The centre of that debate is the extensive research by Ibbotson Associates in the United States. Understanding the equity risk premium forms a critical part of equity valuation and broad asset class valuation. It's used in the capital asset pricing model (CAPM), Fama and French's three-factor model and in any process where return expectations are built on to the risk-free rate.

Myth-busters

Nobody's baby now

Nov 26 2009 00:00

I've read the poets and the analysts

Searched through the books on human behaviour

I travelled this world around

For an answer that refused to be found

I don't know why and I don't know how

But she's nobody's baby now

Nobody's baby, by Nick Cave

COLLECTIVE INSIGHT

Myth-busters

The elusive small cap premium

Nov 26 2009 00:00

MANAGERS OF small capitalisation (small-cap) portfolios have underperformed the market cap-weighted JSE mid- and small-cap index over time. Over a three- and five-year period to July 2009 not one small-cap unit trust manager outperformed the JSE mid- and small-cap index1. That performance is significantly worse than the average general equity fund relative to the JSE All-Share index, with a greater proportion outperforming their benchmark even though 78% of large-cap managers underperform their benchmark. That's consistent with US data, where over the past five years 72,2% of large-cap fund managers have underperformed the S&P500, 77,4% of mid-cap managers have underperformed the S&P400 and almost 80% of small-cap fund managers have underperformed the S&P6002. So, why do small-cap managers struggle to beat their benchmark?

Myth-busters

Factor mimicry and dependence

Nov 26 2009 00:00

VALUE, SIZE and momentum are well-documented factors to indicate future performance. These have been shown to be successful on average over time on many markets, including our own1. "Smart" investors are beginning to use factor-specific products to glean profits in a more strategic way to serve their various investment goals. The challenge is in combining these investment strategies and factors in an optimal way. Whether through multi-management of various style-based products, multi-strategy investment or the use of a multi-factor model how do we combine what we know of the returns to value, small-cap, momentum efficiently and effectively? The answer: carefully and mindful of the changing nature of their relationships.

Myth-busters

Faking value and size

Nov 26 2009 00:00

IF A VALUE INDEX gives a positive return over a long period of time, does that mean value stocks are worth buying or somehow special? If a size index gives a positive return over a long period does that mean small stocks have some sort of return advantage when compared to large stocks? We use a toy model to show a value and size effect can be faked in a simulated market of randomly generated stocks, which shows the conventional sales pitch for value and/or small cap premia is less than satisfying.

Myth-busters

EMH: Myth, myth-busted or myth-understood?

Nov 26 2009 00:00

A finance joke often used to describe the efficient market hypothesis (EMH): two finance professors are walking down the street. One sees a R200 note lying on the pavement and shows it to the other, who says: "That can't be a R200 note or someone would have already picked it up." And so they continue walking...

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