New study of mutual fund alpha shows that what-goes-around-comes-around
Jan 27th, 2010 | Filed under: CAPM / Alpha Theory, Today's Post
For year, researchers have been telling us that one of the biggest determinants of mutual fund alpha (or lack thereof) is a fund’s expense ratio. What little raw alpha is generated, the argument goes, is eaten up by management fees.
On the surface, a new study of “the dynamics of average mutual fund alphas” seems to suggest the same thing. But under the surface, the paper makes an interesting observation about the changing structure of markets themselves. More…
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This phrase jumped out at me: “They also find that the ratio of ’skilled to unskilled’ funds (think ratio of high-tracking error funds to index huggers) . . .”
I’ve been watching this as it relates to the marketing of products. The “tracking error is bad” theme is still pretty entrenched overall at the advisor level (and for “unsophisticated” clients), but it pops up in a lot of ways and places that you wouldn’t expect even among “sophisticated” clients.
It will be interesting to see whether that philosophy changes over time across the business, and whether instead of using a screen that includes a maximum on tracking error people will start with a notion of a minimum threshold below which it’s not worth looking.
Tom Brakke