By |Published On: May 14th, 2015|Categories: Investor Education, Tactical Asset Allocation Research|

Peter Hecht, Ph.D., a fellow Chicago Finance PhD, and vice president of Evanston Capital Management, recently posted an article introducing a practical solution for active portfolios return attribution:

Active ETFs and active mutual funds are meant to beat the market either through superior stock selection or superior market timing–or both. Dr. Hecht emphasizes why it is so important that we critically decompose returns into alpha and beta:

“…the passive/rules based manager represents an opportunity cost to the investor who chooses to go active, and, thus, the active manager needs to beat this opportunity cost on a net of fee basis. Otherwise, there’s no reason for the active manager to exist.”

We all know that identifying alpha is important if we are going to pay managers extra fees to “beat the market.” However, as Dr. Hecht points out, it is difficult for investors to compare manager results due to the “lack of access to cheap, easy to use, easy to understand, consistent, ‘alpha measuring’ infrastructure.”

One solution may be under our noses…

Dr. Hecht higlights the Return Attribution function, which is free for existing Bloomberg users.

Some features of the tool:

  1. Stock selection analysis
  2. Industry effect analysis
  3. Style/Beta exposure analysis

We fired the tool performance analysis tool on our Bloomberg and investigated some of our favorite active ETFs (we’re not huge fans of active mutual funds because of fees and taxes so we didn’t even look at any).

Overall, the tool is very cool! Check it out if you have a Bloomberg.

Read the full article if you are interested!

return attribution

screenshot from Bloomberg

About the Author: Wesley Gray, PhD

Wesley Gray, PhD
After serving as a Captain in the United States Marine Corps, Dr. Gray earned an MBA and a PhD in finance from the University of Chicago where he studied under Nobel Prize Winner Eugene Fama. Next, Wes took an academic job in his wife’s hometown of Philadelphia and worked as a finance professor at Drexel University. Dr. Gray’s interest in bridging the research gap between academia and industry led him to found Alpha Architect, an asset management firm dedicated to an impact mission of empowering investors through education. He is a contributor to multiple industry publications and regularly speaks to professional investor groups across the country. Wes has published multiple academic papers and four books, including Embedded (Naval Institute Press, 2009), Quantitative Value (Wiley, 2012), DIY Financial Advisor (Wiley, 2015), and Quantitative Momentum (Wiley, 2016). Dr. Gray currently resides in Palmas Del Mar Puerto Rico with his wife and three children. He recently finished the Leadville 100 ultramarathon race and promises to make better life decisions in the future.

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For informational and educational purposes only and should not be construed as specific investment, accounting, legal, or tax advice. Certain information is deemed to be reliable, but its accuracy and completeness cannot be guaranteed. Third party information may become outdated or otherwise superseded without notice.  Neither the Securities and Exchange Commission (SEC) nor any other federal or state agency has approved, determined the accuracy, or confirmed the adequacy of this article.

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