Gotta have beta to do better
Tower Asset Management's Paul Bevin ponders which will do better over the long term, a balanced fund or an absolute returns fund.
Thursday, October 2nd 2003, 2:16AM
Tower Asset Management chief executive Paul Bevin says this is understandable, but it isn’t a sensible wealth creation strategy.
“The long term investors are always going to have some beta (market risk) otherwise they wont get the returns they need.”
He points out that 80-90% of returns come from market and only 10-20% come from manager skill – or as it’s called alpha.
He says one of the only ways to avoid market risk and to generate extra returns is to employ skilled managers who can produce alpha. However, not all managers can do that. Often ones that say they can avoid market risk are in fact repackaging it, he says.
“You think you are getting manager skill but all you are getting is repackaged market risk.
“It’s quite hard to strip out the market risk,” he says.
Bevin says hedge funds and absolute return funds are often labelled alpha generating products. However the reality, in Bevin’s view, is different.
“Hedge funds in theory strip the two apart, but there are a lot who don’t do that and there’s a lot of them who think they are adding value because they have found a strategy that’s worked for the last 6 months, or 12 months or three years or whatever. In fact that’s a pure timing thing.”
His message is that if you are a long-term investor then you don’t want to avoid market risk. “You ought to be willing to take it and accept the risk premiums and to collect the premiums from other people who don’t want to take it.”
“Absolute return funds and so forth appear to be the holy grail in that you are going to get some share in the upside if the stock market does well and you won’t lose capital if it goes down. Well that sounds like nirvana “ “But the answer will be, if you look back in five or 10 years time at the return history, that your performance will be like a balanced fund.”
The absolute return fund will have been a more comfortable ride, while a balanced fund will “have some rumpty years.”
But “over a period of time a balanced fund will do better because it’s not as costly to manage the short term risk,” Bevin says.
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