Notice: Home alone tonight?
Topic: The market be like
+Anonymous A β 5 months ago #68,007
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Β·Anonymous A (OP) β 5 months ago, 38 seconds later[T] [B] #673,663
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+Anonymous B β 5 months ago, 19 hours later, 19 hours after the original post[T] [B] #673,727
And we will heard news of business closed down, unemployment rise & if we are lucky, recession is coming.
+Anonymous C β 4 months ago, 1 week later, 2 weeks after the original post[T] [B] #674,169
Bigger, brighter not always a win in performance race
Allocating to alternative investments led to a greater degree of underperformance, analysis shows
ROBERT TATTERSALL CFA, co-founder of the Saxon family of mutual funds and the retired chief investment officer of Mackenzie Investments
Individual investors may believe they operate at a disadvantage in today's financial markets. Their portfolios are too small to gain access to alternative investments such as private equity or infrastructure funds and they are certainly the last to hear when portfolio strategists on Wall Street or Bay Street change their outlook.
If this is your perspective, then a recent article by chartered financial analyst Richard Ennis in the Enterprising Investor blog (hosted by the CFA Institute) will confirm that you actually have nothing to worry about.
His analysis shows that the biggest, and presumably brightest, college endowment funds in the United States underperformed their benchmark index by 2.4 percentage points a year over the 16-year period ending in June, 2024
Furthermore, the greater the exposure to alternative investments, the greater the degree of underperformance.
First, a brief review of credentials: Richard Ennis is not your average run-of-the-mill chartered financial analyst. He managed money at insurance giant Transamerica and pioneered quant investing in the early 1970s. His research has been awarded the Graham and Dodd Award and he has been the editor of the Financial Analysts Journal. In other words, his research conclusions should be taken seriously.
In his article, he plots the returns of those college and university endowment funds with assets in excess of US$1-billion for the fiscal years ending June 30, for the period 2009 through 2024
These returns are compared to a market index which is based on the typical market exposure and risk of U.S. endowment funds, year by year and for the full period.
It is noteworthy that in only two of the years (2021 and 2022) did the endowment funds outperform their benchmark and for the 16-year period the short-fall is an annualized 2.4 percentage points a year.
To be fair, the presence of alternative investments in these portfolios does have a smoothing effect on returns because their net asset value typically lags by a quarter or so before being incorporated into the portfolio valuation.
As a result, if the fiscal year end coincides with a sharp rally or collapse in the stock market, endowments with a significant alternative investment exposure will not register an immediate benefit or penalty.
The author comments that this "pattern of distortion appears to have largely run its course in 2024" This is an argument for a focus on the average annual shortfall of these investments rather than the year-to-year performance.
Mr. Ennis goes on to point out that as a result of trailing their benchmark, these large endowment funds are now worth only 70 per cent of what they could have achieved with a simple strategy of investing in a comparable index fund.
Not all of the shortfall was caused by investing in alternative investments, but he does run a regression analysis to determine the relationship between the excess return of a fund and its exposure to alternative investments.
The correlation is negative. In other words, the higher the exposure, the worse the excess returns. He attributes this to the fact that management fees on this type of investment typically run in the range of 2 per cent to 2.5 per cent of net asset value, so very little incremental return flows through to the client portfolio.
It is hard to disagree with his conclusion: "If you can tolerate the risk, allocating to equities pays off over time. Allocating to alternative investments, however, has been a losing proposition since the global financial crisis. And the more you own, the worse you do."
As individual investors, it looks as if we dodged a bullet by not qualifying for these exotic opportunities.