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Jun 14

To find alpha, first define it

A couple of months ago I presented at a Portfolio Construction Academy forum of around 70 financial planners and researchers about constructing investment portfolios and fund manager assessment using risk factors. From what I can tell the session went quite well and much to my relief the feedback was quite positive.

Following the presentation I was interviewed by James Dunn, finance journalist and “Editor-at-Large” for Portfolio Construction Forum, about the basic risk factors everyone has in their portfolios…alpha and beta (or skill and market risk). Last week the article was published for the Portfolio Construction Forum and assuming you can access it (not sure if a login and password is required) you can find it by clicking here. If you need a login…get one…Portfolio Construction Forum is a great investment resource (disclosure….I get nothing for this plug).

Some of the key points that are quite well explained include…

  • alpha is risk-adjusted outperformance not outperformance alone
  • alpha is often beta in disguise…for example, leveraging an Aussie shares index fund over the last 12 months would have outperformed the index…but there’s no skill (or alpha) in that
  • if you think your portfolio has the equivalent of x% in Aussie and global shares…be careful not to load too much on small cap, property, or emerging markets as your true market exposure (or beta) maybe much greater than x%

Anyway, I have no intention of expanding the above points as the article does a pretty good job.

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