Performance Attribution for Active ETFs and Active Mutual Funds
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:
- Stock selection analysis
- Industry effect analysis
- 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!
Note: This site provides no information on our value investing ETFs or our momentum investing ETFs. Please refer to this site.
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Definitions of common statistics used in our analysis are available here (towards the bottom)