Perspective

 Equity Risk Oversight
 Presentation summarizing the value of using an equity risk model built for oversight.

 

Sample Equity Risk and Skill Analysis

 

Mutual Fund Closet Indexing

Over a third of U.S. equity mutual funds are currently so passive that, even if they exceed the information ratios of 90% of their peers, they will still fail to overcome a typical fee.

 

Three Holdings-Based Style Analysis Tests

 Or How to Tell if You Are Paying Top Dollar for a Flawed System.

 

The Flaws of Returns-Based Style Analysis
Returns-based analysis can be effective—but only when a manager does not significantly vary exposures to passive market, sector, and macroeconomic factors.

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Performance Persistence Within Style Boxes

Security selection returns, when properly calculated with a robust factor model, persist and yield portfolios that outperform. Both skill and lack of skill persist, and the lack of skill persists most strongly; while it is important that investors correctly identify the talented managers, it is even more important to divest from their opposites.

 

Performance of Top U.S. Stock Pickers 2016

 Security selection returns of the top U.S. stock pickers in 2016 were positive. When hedged to match market risk, a consensus portfolio of the top institutional U.S. stock pickers outperformed the Market by approximately 2%.

 

Performance Persistence Within International Style Boxes

Whereas nominal returns and related simplistic metrics of investment skill revert, security selection performance – once properly distilled with a capable factor model – persists.

 

Hedge Fund Closet Indexing

20% of long U.S. hedge fund portfolios surveyed are currently so passive that, even after exceeding the information ratios of 90% of their peers, they will still fail to merit a typical fee. Investors must monitor the evolution of their hedge fund managers towards closet indexing and mitigate fee harvesting.

 

What Fraction of Smart Beta is Dumb Beta?
Traditional, or dumb, Market and Sector Betas account for over 92% of variance for most U.S. equity smart beta ETFs. Smart beta, unexplained by the traditional Market and Sector Betas, accounts for under 8% of variance for most U.S. equity smart beta ETFs. With proper analytics, investors and allocators can guard against elaborate re-packaging of dumb beta as smart beta.

 

Equity Risk: Is the Tail Wagging the Dog?

Equity portfolio oversight that fails to consider market and other factor exposures overlooks the principal drivers of performance and risks focusing on noise.  Read More

 

Portfolio Oversight: Why Should Your Manager Have All the Information?
Passive exposures to market and other factors overwhelm the impact from security selection and market timing on risk and return – explaining 98.7 percent of absolute performance and two-thirds of performance relative to the market.   Read More

 

Why Investment Risk and Skill Analytics Matter

Properly-designed risk models can be used to filter out the effects of systematic risk, exotic market bets, and luck. When these models are designed from the ground-up to evaluate skill, and are combined with robust statistical techniques, the result is predictive analytics. Read More

 

Property Casualty Industry Crowding

Property and casualty insurance company portfolios share a few systematic bets. These crowded bets are the main sources of the industry’s and many individual insurers’ relative investment performance. Since the end of 2013, these exposures have cost the industry billions.   Read More

 

Thoughts on DFA Modeling

Avoid complexity for the sake of complexity.  Read More

 

Testing Predictions of Equity Risk Models

We analyze historical positions and returns of approximately 3,000 non-index U.S. Equity Mutual Funds over 10 years.  Read More

 

Testing Equity Risk Models
Complex equity risk models may offer no better predictions than robust statistical models with a few intuitive factors.  Read More

 

Testing Global Equity Risk Models
 An intuitive Global Statistical Equity Risk Model using Regional and Sector/Industry factors delivers over 0.96 correlation between predicted and reported portfolio returns for a median U.S. Equity Mutual Fund.  Read More

 

Is Performance Evaluation Worthwhile?

Effective benchmarking provides sufficient information to determine as early as possible when corrective action is necessary.  Read More

 

Returns-Based Style Analysis: Overfitting and Collinearity 
Plagued by overfitting and collinearity, returns-based style analysis frequently fails, confusing noise with portfolio risk.  Read More

 

Hedge Fund Mean Reversion
With predictive analytics and a robust model, investors can not only identify persistently strong stock pickers but also construct portfolios with predictably strong nominal performance.  Read More

 

Why Are Investment Performance Reviews So Boring

What would you do if your equity manager underperformed the index by six percent? Three steps to meaningful, actionable performance reviews.  Read More

 

Impact of Taxes on Asset Allocation   

Tax considerations influence both relative rates of return and variability of asset classes, increasing the relative attractiveness of equity.

 

  © Stephan Pastis

 

 

 

 

 

 

 

 

 

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