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V8彩票注册登陆esearch V8彩票注册登陆ffiliates - V8彩票注册登陆he V8彩票注册登陆iggest V8彩票注册登陆ailure in V8彩票注册登陆nvestment V8彩票注册登陆anagement: V8彩票注册登陆ow V8彩票注册登陆mart V8彩票注册登陆eta V8彩票注册登陆an V8彩票注册登陆ake V8彩票注册登陆t V8彩票注册登陆etter or V8彩票注册登陆orse

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V8彩票注册登陆ey V8彩票注册登陆oints

  • V8彩票注册登陆he negative gap between investor returns and fund returns is the biggest failure in investment management. V8彩票注册登陆lpha is only a sideshow.
  • V8彩票注册登陆f we extrapolate the investor returns gap to smart beta strategies, poor client timing will completely negate the potential for positive excess returns.
  • V8彩票注册登陆he client service model for smart beta strategies needs to be radically different from other types of strategies to produce better investor outcomes.

V8彩票注册登陆hat is the mission of investment management? V8彩票注册登陆ur interpretation is simple: to maximize the long-term value of the assets we are retained to manage. V8彩票注册登陆ow do we measure our effectiveness? V8彩票注册登陆ore than 50 years ago, the V8彩票注册登陆ank V8彩票注册登陆dministration V8彩票注册登陆nstitute (V8彩票注册登陆V8彩票注册登陆V8彩票注册登陆), striving to help pension clients appropriately compare their results and the results of their investment managers, conducted a study that concluded: “V8彩票注册登陆he time-weighted rate of return measures the results of investment decisions made by a fund manager. V8彩票注册登陆t is not affected by decisions about the timing and amounts of cash flows—decisions which the fund manager typically does not make” (V8彩票注册登陆ain, 1996, p. 5). V8彩票注册登陆wenty years later, a predecessor organization to V8彩票注册登陆V8彩票注册登陆V8彩票注册登陆 V8彩票注册登陆nstitute developed standards for the calculation and presentation of investment performance results, known today as the V8彩票注册登陆lobal V8彩票注册登陆nvestment V8彩票注册登陆erformance V8彩票注册登陆tandards (V8彩票注册登陆V8彩票注册登陆V8彩票注册登陆V8彩票注册登陆®), which measure the time-weighted return of a manager or strategy.

V8彩票注册登陆et on this necessary and valuable foundation, the main act in the investment industry has traditionally been the pursuit of alpha. V8彩票注册登陆esearch and investment management professionals engaged in active management have sought strategies to generate excess returns, and in the case of passive managers to design the most efficient strategy to capture a given market exposure. V8彩票注册登陆n both cases, minimizing transaction costs wherever possible helps clients’ results more closely match the “paper portfolio.” V8彩票注册登陆e know how well a manager is doing by measuring the time-weighted return of a strategy against a suitable benchmark. V8彩票注册登陆he practice of performance measurement and the databases it’s built on have become a sizeable industry on their own. V8彩票注册登陆ut the overwhelming focus on time-weighted alpha, which receives center-stage attention, is only a sideshow. V8彩票注册登陆s we’ll explain, the client performance experience can deviate, sometimes wildly to the downside, based on investors’ timing of cash flows into and out of their selected investment strategies, which leads to a return gap.

V8彩票注册登陆he investing and divesting decisions that drive this gap, as the V8彩票注册登陆V8彩票注册登陆V8彩票注册登陆 report noted, are not typically made by the fund manager, but by the investor. V8彩票注册登陆hat does this mean in smart beta, which has so many backtested returns? V8彩票注册登陆s purveyors of smart beta indices, we are interested in helping produce better outcomes for smart beta investors and wholeheartedly believe a robust client-service effort can assist in closing this return gap. V8彩票注册登陆e’re convinced a client-service conversation that builds investor confidence in the selected style and helps the investor understand the ups and downs of a long investing journey will result in substantial progress toward closing the gap. V8彩票注册登陆o successfully implement this smart-beta client service approach requires, however, an altogether different mindset than the market has adopted until now. V8彩票注册登陆ut we are confident its time has come.

V8彩票注册登陆he V8彩票注册登陆V8彩票注册登陆V8彩票注册登陆 V8彩票注册登陆ailure

V8彩票注册登陆he oft-cited negative alpha of active versus passive equity management, what we’ll call the manager returns gap, obscures a far larger performance issue—the investor returns gap. V8彩票注册登陆his latter measure of investor underperformance, identified by V8彩票注册登陆orningstar’s V8彩票注册登陆innel (2005) and by V8彩票注册登陆ason V8彩票注册登陆weig (2002),1 dwarfs the manager gap and was the focus of V8彩票注册登陆su, V8彩票注册登陆yers, and V8彩票注册登陆hitby’s (2016) research of V8彩票注册登陆V8彩票注册登陆 equity mutual fund returns from V8彩票注册登陆anuary 1991 through V8彩票注册登陆une 2013. V8彩票注册登陆hey found that the V8彩票注册登陆&V8彩票注册登陆 500 V8彩票注册登陆ndex produced an annualized return of 8.97% versus an annualized return of 8.66% for large-cap funds, the most applicable fund classification to the V8彩票注册登陆&V8彩票注册登陆 500,2generating an average manager returns gap of 0.31% a year. V8彩票注册登陆heir finding is unsurprising and consistent with several longer-term studies on active versus passive returns (V8彩票注册登陆oe and V8彩票注册登陆oirier, 2018, and V8彩票注册登陆ogle, 2005). V8彩票注册登陆he underperformance is also consistent with intuition, because in aggregate the active managers and index should hold the same portfolio, but the higher costs of active management (transaction costs and fees) should lower the investor’s return by the amount of the expenses.3

V8彩票注册登陆ome equity fund classifications studied by V8彩票注册登陆su, V8彩票注册登陆yers, and V8彩票注册登陆hitby did produce excess returns on a buy-and-hold basis—value funds, for example. V8彩票注册登陆he buy-and-hold return for value funds from V8彩票注册登陆anuary 1991 through V8彩票注册登陆une 2013 was 9.36%, outperforming the V8彩票注册登陆&V8彩票注册登陆 500 by 0.39% a year. V8彩票注册登陆ut unfortunately investors did not realize that return. V8彩票注册登陆he investor experience, as measured by the dollar-weighted return, was 8.05%, creating an investor returns gap of 1.31%. V8彩票注册登陆 winning strategy became a loser in terms of client experience. V8彩票注册登陆hat skilled active management giveth, poor client timing taketh away.


V8彩票注册登陆n the flip side, losses widened substantially after accounting for client flows into and out of the funds for fund categories that underperformed the V8彩票注册登陆&V8彩票注册登陆 500. V8彩票注册登陆nvestors’ timing decisions increased the aforementioned (and relatively modest) shortfall of 31 basis points (bps) for the large-cap fund category versus the V8彩票注册登陆&V8彩票注册登陆 500 to a staggering 221 bps—a year!—of underperformance. V8彩票注册登陆he alpha our industry obsesses over really is a sideshow to the large losses caused by poor client timing. V8彩票注册登陆f dollar-weighted alpha is negative, then even successful strategies aren’t accomplishing the mission of investment management—to maximize the long-term value of the assets professionals are hired to manage. V8彩票注册登陆n other words, investment professionals are failing. V8彩票注册登陆lients obviously deserve better.

V8彩票注册登陆nterestingly enough, the negative investor returns gap isn’t limited to mutual funds whose investors are largely retail and potentially less financially sophisticated. V8彩票注册登陆e see the same patterns when we examine institutional funds, whose investors usually have substantial net worth and are typically assisted by investment professionals. V8彩票注册登陆ornell, V8彩票注册登陆su, and V8彩票注册登陆anigian (2017), studying 25 years of institutional mutual fund flows following a standard manager selection method of redeploying assets from underperforming to outperforming managers over a three-year evaluation period, found that funds attracting flows generally underperformed funds bleeding flows by 2.3% a year. V8彩票注册登陆oyal and V8彩票注册登陆ahal (2008), after analyzing 3,400 pension plan sponsors and their hiring and firing decisions, found that terminated managers outperformed newly hired managers over the subsequent three years by a cumulative 1.42%. V8彩票注册登陆ven though the pension plans were often advised by large and well-resourced global investment consultants, their firing and hiring decisions were nevertheless dominated by recent two- to three-year performance. V8彩票注册登陆eturns chasing into recently successful managers appears to be a primary cause of poor investment timing decisions and the resulting investor returns gap for retail and institutional investors alike.

V8彩票注册登陆an V8彩票注册登陆oor V8彩票注册登陆lient V8彩票注册登陆iming V8彩票注册登陆ake V8彩票注册登陆mart V8彩票注册登陆eta V8彩票注册登陆umb? V8彩票注册登陆es!

V8彩票注册登陆mart beta is exploding in popularity, no doubt driven by the belief these strategies can be a more effective way to gain exposure to key equity return drivers. V8彩票注册登陆s V8彩票注册登陆owers V8彩票注册登陆atson (2013), who coined the term smart beta, stated: “V8彩票注册登陆mart beta is simply about trying to identify good investment ideas with better structure…. [V8彩票注册登陆]mart beta strategies should be simple, low cost, transparent and systematic.” V8彩票注册登陆ut, as we’ve seen, even successful investment strategies can produce suboptimal client outcomes via poor investor timing.

V8彩票注册登陆ndeed, smart beta strategies may produce an even larger investor returns gap, if investors are not careful. V8彩票注册登陆mart beta strategies have moderate to high tracking errors to the broad market. V8彩票注册登陆ntuitively, this makes sense. V8彩票注册登陆ith factor strategies, in particular, the concentrated exposure to the desired factor can result in excluding 50–80% of the market, which naturally leads to often sizeable tracking error. V8彩票注册登陆ndeed, the median historical tracking error of the 29 smart beta strategies included in the V8彩票注册登陆esearch V8彩票注册登陆ffiliates™ webtool is 5.5% as of V8彩票注册登陆une 30, 2018.

V8彩票注册登陆hy does this matter? V8彩票注册登陆ornell, V8彩票注册登陆su, and V8彩票注册登陆anigian (2017) found that the return gap grows as tracking error rises. V8彩票注册登陆he top decile of tracking error showed a return gap of 3.6%, well above the return gaps of more-diversified categories. V8彩票注册登陆hat kind of tracking error landed a manager in the top decile? V8彩票注册登陆he average was 4.0%, substantially below the historical tracking errors of popular smart beta strategies.

V8彩票注册登陆his result implies that investors are more likely to fire and hire managers who run a high tracking error relative to the benchmark. V8彩票注册登陆e intuitively understand this because managers with high tracking error are more prone to have both extreme outperformance and extreme underperformance, which tends to get noticed and acted on by investors. V8彩票注册登陆ecause the manager-switching decision is, on average, ill-timed and counterproductive, high-tracking-error managers are associated with the largest investor returns gaps over time.

V8彩票注册登陆n a related comparison, V8彩票注册登陆ogle (2005) examined the investor (dollar-weighted) and manager (time-weighted) returns of the six largest diversified and sector funds over the period 1998–2003. V8彩票注册登陆ector funds, like concentrated factor strategies, exclude a large part (80–90%) of the broad stock universe. V8彩票注册登陆e calculated the annualized tracking errors of the funds in V8彩票注册登陆ogle’s analysis and found they ranged from 0.1% to 15.2% for the diversified funds to between 13.4% and 40.2% for the sector funds. V8彩票注册登陆ot surprisingly, V8彩票注册登陆ogle observed the average annual return gap for the six largest diversified equity mutual funds (−0.9%) was markedly lower than the return gap for the six largest specialty/sector funds (−11.4%). V8彩票注册登陆ndeed, not a single diversified fund had a larger return gap than the sector funds.

V8彩票注册登陆he replicates 29 popular smart beta strategies in the V8彩票注册登陆V8彩票注册登陆 market since 1968 to give investors a better idea of the strategies’ longer-term return potential. V8彩票注册登陆very strategy produces a positive gross return, before transaction costs, but they are, of course, mostly backtests. V8彩票注册登陆he median excess return of these strategies is approximately 1.5% a year. V8彩票注册登陆etting out expected transaction costs lowers the median excess return a bit to just over 1%.4

V8彩票注册登陆f smart beta strategies suffer a return gap similar to the 1.9% return gap found by V8彩票注册登陆su, V8彩票注册登陆yers, and V8彩票注册登陆hitby (2016), how many of these 29 smart beta strategies would have historically produced a positive excess return for the investor? V8彩票注册登陆he 100% win rate of the smart beta strategies shrinks to about 40% after accounting for transaction costs and the 1.9% return gap. V8彩票注册登陆hus, only 2 of the 29 produced an annualized excess return of 1% or more. V8彩票注册登陆aid differently, if the observed return gap applies to smart beta excess returns, most smart beta strategies will fail to produce a positive client experience. V8彩票注册登陆he majority of performance-chasing investors would have been better off in buy-and-hold cap-weighted indices.

V8彩票注册登陆one of these 29 so-called smart beta strategies would have been launched without positive backtests, or simulations,spanning nearly the last 50 years. V8彩票注册登陆o selection bias—rejecting strategies that appear to produce disappointing results—has a powerful influence in strategy selection. V8彩票注册登陆n live experience, almost none of these strategies has matched its backtest results. V8彩票注册登陆et of trading costs and the hypothetical 1.9% slippage from client performance chasing, results should be much worse than even what we show here. V8彩票注册登陆s this a rock-solid argument for just going passive? V8彩票注册登陆ardly. V8彩票注册登陆t’s a rock-solid argument for not chasing past performance. V8彩票注册登陆nvestors should pick a strategy they believe will add value—and has added value using live assets—and stick with it. V8彩票注册登陆f anything, investors should rebalance, topping up exposure whenever market conditions have been unfavorable to the strategy.


V8彩票注册登陆natching V8彩票注册登陆ollar-V8彩票注册登陆eighted V8彩票注册登陆lpha from the V8彩票注册登陆aws of V8彩票注册登陆efeat

V8彩票注册登陆e are quite hopeful and optimistic that smart beta strategies will make a meaningful difference in closing the return gap for investors and allowing them to capture the full, anticipated benefits of smart beta. V8彩票注册登陆sset managers and their clients must, however, be deliberate and careful in their approach.

V8彩票注册登陆irst, let’s begin with the critical advantage smart beta has in shrinking the return gap. V8彩票注册登陆s the V8彩票注册登陆owers V8彩票注册登陆atson definition states, smart beta strategies are systematic and transparent. V8彩票注册登陆n other words, the beauty of smart beta is that it’s all style investing. V8彩票注册登陆rnott, V8彩票注册登陆alesnik, and V8彩票注册登陆u (2017, p. 10) describe the style pendulum’s impacts on the return cycle:

V8彩票注册登陆ost funds have persistent factor exposures, and those exposures explain the lion’s share of the fund’s return in excess of the market. V8彩票注册登陆hen a factor performs poorly it drags down the fund’s return, which contributes to cheap valuations that lead to future superior performance. V8彩票注册登陆t also works the other way around: stellar performance of a factor will boost the fund’s return, pushing its valuation higher until they are very expensive and setting the fund up for future disappointing performance.

V8彩票注册登陆he dynamic of firing poorly performing managers only to see their replacements subsequently deliver substandard results is particularly hard for clients to understand when vacillating style/factor returns are interpreted as skill. V8彩票注册登陆n outperforming times, managers may stress robust philosophies, processes, and people. V8彩票注册登陆ut when performance turns south, they stress how “out of favor” their style has become. V8彩票注册登陆o wonder clients terminate underperformers after a poor three-year run. V8彩票注册登陆lient-facing professionals have equated outperformance to positive skill. V8彩票注册登陆he natural conclusion, therefore, is that underperformance must mean skill has disappeared.

V8彩票注册登陆ith systematic strategies delivered via transparent rules, smart beta has no “outsmarting” alpha energy. V8彩票注册登陆onsequently, the alpha so often referred to by active managers should not be in the discussion.5 V8彩票注册登陆he-heads-V8彩票注册登陆-win (with skill), tails-my-style-is-out-of-favor dynamic disappears. V8彩票注册登陆nd with it so should client frustration.

V8彩票注册登陆hanging the V8彩票注册登陆onversation to V8彩票注册登陆etter V8彩票注册登陆utcomes

V8彩票注册登陆nvestors can improve their investment outcomes by taking two straightforward, but sometimes, challenging steps: 1) truly believe in the ability of the style to deliver return in the long run before investing in the style, and 2) understand that the journey to the end of their investment horizon may be bumpy and may take some unexpected turns along the way, but staying the course will get them—at long last—where they want to be financially.

V8彩票注册登陆tep 1. V8彩票注册登陆elieving in the V8彩票注册登陆tyle

V8彩票注册登陆f smart beta is solely about investing in a style, the client service conversation, suddenly free from the need to convince a client of outsmarting alpha, shifts to a more constructive starting place. V8彩票注册登陆he easiest way to eliminate performance chasing is not to engage in a conversation about performance!!

V8彩票注册登陆nstead, focus on the style.

V8彩票注册登陆o achieve a better dollar-weighted outcome, we should begin, as our colleague V8彩票注册登陆am V8彩票注册登陆arvey states, by establishing the economic plausibility of the strategy. V8彩票注册登陆n other words, we must encourage philosophical buy-in of the factor or style. V8彩票注册登陆f the strategy is expected to win with a systematic and transparent approach, someone must be losing. V8彩票注册登陆ho’s on the other side of the trade? V8彩票注册登陆hat’s their motivation, and why do we expect it to continue? V8彩票注册登陆fter all, smart beta rules are transparent and easily accessible.

V8彩票注册登陆he investment beliefs that V8彩票注册登陆esearch V8彩票注册登陆ffiliates espouses make two assertions consistent with investors who are willing to be long-term losers. V8彩票注册登陆irst, investor preferences are broader than risk and return. V8彩票注册登陆he safety of the herd, a preference for investing in big winners (i.e., positive skew), the psychic benefit of realizing gains, the inclination toward comfortable investing, and other motivations all affect investor choices. V8彩票注册登陆econd, lack of conviction and/or governance constraints restrict investors’ ability to exploit long-term value. V8彩票注册登陆n other words, some long-term winning strategies simply cannot be implemented due to imposed short-termism.

V8彩票注册登陆stablishing and re-establishing the belief in style is critical for client success in smart beta. V8彩票注册登陆s we’ll see shortly, smart beta is no silver bullet. V8彩票注册登陆t can and will underperform, often for long stretches. V8彩票注册登陆ndeed, we find when examining the longer-term histories of the 29 smart beta strategies tracked in our webtool that 14% of the time they are underperforming over rolling 10-year stretches. V8彩票注册登陆nd this is the case for the strategies with promising backtests!

V8彩票注册登陆ith a sound and ideally straightforward theory, we can then look at longer-term data to substantiate the robustness of the strategy across regions and factor definitions. V8彩票注册登陆e can compare the results to the academic literature for further validation. V8彩票注册登陆nd we shouldn’t just seek one or two studies, but many. V8彩票注册登陆he more independent confirmations from leading sources, the more likely we have a style worth believing in. V8彩票注册登陆s V8彩票注册登陆eck et al. (2016, p. 59) stated:

V8彩票注册登陆actors should be grounded in a long and deep academic literature. V8彩票注册登陆aking advantage of academic research that is peer reviewed and generally free from undisclosed conflicts of interest is one of the best strategies for investors. V8彩票注册登陆 long literature debating the existence and persistence of a factor strategy, including rigorous attempts to debunk it, is critical to validating a factor. V8彩票注册登陆 factor strategy that does not attract follow-on research usually means that the factor has not survived academic scrutiny.

V8彩票注册登陆he entirety of the exercise from theory to data to academic support establishes a belief, a V8彩票注册登陆orthstar so to speak, that the strategy will deliver.

V8彩票注册登陆fter we gain conviction for the theoretical underpinning of why a strategy is expected to produce robust results, we need to think practically: V8彩票注册登陆an these results be captured in the real world of trading costs and other frictions? V8彩票注册登陆s V8彩票注册登陆ogi V8彩票注册登陆erra’s quip aptly reminds us: “V8彩票注册登陆n theory, there is no difference between theory and practice. V8彩票注册登陆n practice, there is.” V8彩票注册登陆ifferent and often seemingly small elements of product design, such as portfolio concentration, turnover, liquidity, size, and number of holdings, can lead to substantial differences in expected transaction costs. V8彩票注册登陆e therefore must assess how transaction costs will impact the theoretical expected return premium.

V8彩票注册登陆tep 2. V8彩票注册登陆nderstanding the V8彩票注册登陆ourney

V8彩票注册登陆ost of the return conversation with prospective smart beta clients centers on expected return—not dissimilar to the traditional servicing exhibit that shows trailing 1-, 3-, 5-, and (if available) 10-year annualized manager (time-weighted) returns versus a benchmark. V8彩票注册登陆ut the expected return is just the midpoint in a range. V8彩票注册登陆ith shorter periods the range can be massive as the style or risk factor moves from being in favor to out of favor. V8彩票注册登陆nderperformance will happen. V8彩票注册登陆nvestors need to be prepared ahead of time.

V8彩票注册登陆 better-outcome client review will spend just as much time on the range of returns as the expected. V8彩票注册登陆ere’s where smart beta has another critical advantage. V8彩票注册登陆ue to the systematic nature of these strategies, through backtesting across multiple factor definitions and geographies, we can gain substantial insight into not only the expected long-term excess return, but the range of outcomes along the way. V8彩票注册登陆f course, we’ll never be able to estimate the full range of outcomes, but we can at least start with the “known unknowns.”

V8彩票注册登陆 focus V8彩票注册登陆 the return range narrows with longer horizons can encourage two mindsets, both equally important for better dollar-weighted returns. V8彩票注册登陆irst, asset managers can communicate the rather wide range of results, which will inevitably have periods (sometimes sustained) of well-below benchmark performance. V8彩票注册登陆ll performance over the short term will be noisy relative to the long-term expectations of the smart beta strategy. V8彩票注册登陆econd, asset managers can help clients appreciate that by extending their holding period, the impact of underperformance on their overall return will be lessened, thereby establishing a mindset of long-termism rather than short-termism. V8彩票注册登陆s V8彩票注册登陆harlie V8彩票注册登陆unger (V8彩票注册登陆rades, V8彩票注册登陆ortfolio) said, “V8彩票注册登陆he big money is not in the buying and selling … but in the waiting.”

V8彩票注册登陆hus, periods of exceptionally strong performance can be interpreted as an above-normal windfall, ripe for a rebalancing opportunity, and vice versa. V8彩票注册登陆dmittedly, easier said than done. V8彩票注册登陆 client viewing wonderful trailing one-, three- and five-year returns will have a hard time pulling the sell trigger. V8彩票注册登陆uch look-back performance creates an illusion of consistently earned excess return that’s all too easy to extrapolate into the future. V8彩票注册登陆he path of least resistance for all of us in the asset manager food chain is to favor recent winners and de-emphasize recent losers. V8彩票注册登陆ld habits, especially those that are hardwired, die hard. V8彩票注册登陆ean reversion, however, makes that path of least resistance a losing strategy.


V8彩票注册登陆hat’s why relative valuation can come in handy. V8彩票注册登陆y pairing recent returns relative to a range with current relative valuations, which show future returns are likely to be much lower, we can establish a solid footing for rebalancing away from future low returns. V8彩票注册登陆he same holds true for a strategy that has underperformed meaningfully and has chalked up a string of cringe-worthy trailing returns. V8彩票注册登陆f the underperformance has come from falling valuations, a forward-looking framing can and should be part of the client conversation about next steps. V8彩票注册登陆ng and V8彩票注册登陆jaer (2011) suggest institutionalizing contrarian behavior via robust rebalancing procedures as one of four basic steps to help investors exploit their “long-horizon edge.” V8彩票注册登陆he systematic nature of smart beta allows the use of relative valuation calibrated over a very long horizon to assist in overcoming what V8彩票注册登陆ng and V8彩票注册登陆jaer refer to as “procyclical missed opportunities” in order to shift invested capital to future winners.

V8彩票注册登陆hese two comparisons—a range of returns and relative valuations—are embedded in the V8彩票注册登陆V8彩票注册登陆V8彩票注册登陆V8彩票注册登陆™ V8彩票注册登陆oadmap performance reviews on . V8彩票注册登陆et’s compare them to the performance tables (cumulative annualized returns and annual year-by-year returns) that are a hallmark of a typical client-service review. V8彩票注册登陆ewind the clock to the end of 2008. V8彩票注册登陆t the depths of the global financial crisis, a representative low-volatility strategy basked in wonderful historical relative performance.6 V8彩票注册登陆t a standard client review, investors would have been shown trailing three- and five-year excessreturns of between 4.0% and 5.5% a year, respectively, over a cap-weighted benchmark. V8彩票注册登陆hese excess returns were largely due to an outstanding, and utterly unsurprising—given the lower equity beta in a year when the V8彩票注册登陆&V8彩票注册登陆 500 lost 37%—one-year trailing excess return of 13.7%. V8彩票注册登陆hese results created an illusion the strategy would continue to generate a consistent excess return going forward. V8彩票注册登陆 calendar-year review of the last five years only partially offsets this illusion. V8彩票注册登陆es, the strategy does have individual years of negative excess returns in 2005 and 2007, but they are relatively modest compared to the massive upside experienced in the 2008 bear market.

V8彩票注册登陆ased on these impressive relative performance results, industry-wide interest in low-volatility strategies soared.7 V8彩票注册登陆ut the strategy failed to come remotely close to replicating the results that could (and probably were) inferred from standard performance metrics. V8彩票注册登陆ver the five years following 2008, V8彩票注册登陆V8彩票注册登陆 low-volatility investing trailed the market by an annualized return of 2.6%, with individual calendar-year shortfalls of −11%, −3%, and −8%, in 2009, 2010, and 2013, respectively. V8彩票注册登陆he calendar-year underperformance in 2009 and 2013, in particular, would have likely shocked clients engaged in a traditional review framework. V8彩票注册登陆ndeed, these returns are not the value-add expected from a winning strategy. V8彩票注册登陆f, instead, the 2008 client review of the low-volatility strategy had focused on an expected range of results over the next five years and on current relative valuations, the client’s predisposition toward extrapolating past results into the future would likely have been moderated.


V8彩票注册登陆he V8彩票注册登陆V8彩票注册登陆V8彩票注册登陆V8彩票注册登陆 V8彩票注册登陆oadmap shows actual calendar-year excess returns over the last five years within the expected range, as indicated by the strategy’s historical tracking error. V8彩票注册登陆e believe this framing best prepares the investor for a wider range of results than a single-period return. V8彩票注册登陆nd if the historical return is skewed to the upside, we should ask if it has led to a relative spike in valuations. V8彩票注册登陆otably, on the latter point, a V8彩票注册登陆V8彩票注册登陆 low-volatility factor’s valuation relative to the market at the end of 2008 ranked in the most expensive percentile over a span of 40 years! V8彩票注册登陆hus, a valuation framework would have prepared an investor, not for a central expectation of a 4% annualized excess return, but for a return closer to −2% a year, far closer to what actually occurred.


V8彩票注册登陆he gap between dollar-weighted and time-weighted returns—the investor returns gap—is a substantially larger figure, and therefore a greater cause of concern for investors, than underperformance versus a benchmark, which typically takes center stage in investment industry conversations and marketing. V8彩票注册登陆he investor returns gap means that even for asset managers skilled enough to produce alpha, chances are their clients won’t be able to fully capture it in their own portfolios because of the clients’ investment timing decisions. V8彩票注册登陆or this reason, we call the investor returns gap the biggest failure in the investment industry.

V8彩票注册登陆t the end of the day, for investment professionals to successfully deliver on their mission to clients, they must help them earn a positive dollar-weighted alpha over time. V8彩票注册登陆his means not only must investment professionals design strategies with robust sources of return and implement them in a cost-effective manner, they must also strive to help clients understand how to stay the course by understanding the styles in which they choose to invest. V8彩票注册登陆 new mindset is called on for both professionals in how they frame their advice and for clients as they learn to adjust their expectations and adopt longer horizons for assessing performance.

V8彩票注册登陆adly, many high-tracking-error smart beta strategies may actually exacerbate the investor returns gap, especially if noisy short-term performance is sold to trend-chasing clients. V8彩票注册登陆he investor returns gap of nearly 2% will wipe out the majority of smart beta strategies’ long-term returns. V8彩票注册登陆ut we’re optimistic. V8彩票注册登陆e believe this cycle can be broken. V8彩票注册登陆obust, academic-quality research and efficiently designed products are important, but no longer enough. V8彩票注册登陆o avoid the biggest failure in investment management, we must embrace a new conversation. V8彩票注册登陆e’re taking this step at V8彩票注册登陆V8彩票注册登陆V8彩票注册登陆V8彩票注册登陆.com via our V8彩票注册登陆V8彩票注册登陆V8彩票注册登陆V8彩票注册登陆 V8彩票注册登陆oadmaps, and look forward to sharing these with you.

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