Concept of portable alpha helps fund manager to outperform market
As markets show increasing signs of vulnerability and investors wonder whether the new cycle has run its course, investment skill is becoming an ever more valuable commodity.
Standard & Poor’s latest Asset Allocation report examines the potential benefits and limitations for investors of separating skill-driven returns from traditional market returns as part of their investment strategy.
During the past 20 years investors and their advisors have become increasingly adept at separating market risk and the rest, leading to concepts such as index benchmarks, tracking error, and culminating recently in the concept of portable alpha.
Thus investors can now get exposure to traditional markets (or beta-type risk) cheaply, leaving an investment manager to concentrate on providing alpha or skill-driven returns.
Importantly, investors can easily track whether those returns are in fact being driven by the market (or in theory any other factor such as oil prices) or are genuinely the result of manager skill.
According to Standard & Poor, they believe that it is possible to find managers that outperform the market, but this task is made much easier with if you are not constricted in where you look.
This is particularly relevant as investors wish to, or have to concentrate their market exposure, in the efficient markets where it is difficult to add value.
Markets have continued to remain volatile, but as long as corporate profits remain strong and defaults low, these losses can still be seen as merely an unwinding of some of the exuberance of the past 18 months.
The high levels of cash on corporate balance sheets should also mitigate the prospect of a serious and extended credit crunch affecting profits across the economy in the near term.
27-Aug-2007