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So we're near the end of two pages of discussion on this topic and not ONE time has the term "alpha" been stated
If I own a volatile fund, I expect it to go down more than the market. But I also look for it to more than make up that underperformance on the upswing.
That's an intuitive description of alpha, at least for funds with beta above one. Though I should have been clearer, by "market" I meant the submarket of the investible universe in which the fund operates, as opposed to the "broad market" or "market as a whole".
While alpha purports to quantify this sense of outperformance, it has a number of flaws, starting with Investopedia's definition. When a fund's performance is regressed against an inappropriate benchmark (such as calculating alpha of a sector fund by comparing it to the "broad market") the result is meaningless (low R²).
In case there's any uncertainty that by "broad market" Investopedia means the investible universe, it removes all doubt when it says that "there is no way to systematically earn returns that exceed the broad market as a whole." That's true only if it is impossible for a fund to fish outside of the "broad market", i.e. if the broad market includes "everything".
Yogi alluded to this problem, noting that with Zacks one often doesn't know what the benchmark is.
Timeframe is another problem with alpha. Lewis implicitly flagged this in pointing out that fund performance is typically inconsistent. While I generally like using standardized time frames, for statistics like alpha and beta complete market cycles would seem to give more meaningful figures.
FWIW, PRWAX beats the S&P for ALL SIX YTD-to-Life interim periods. We are current and LT holders of PRWAX (drumroll) because of its alpha and those results.
Rule 482 [see 17 CFR § 230.482(d)(3)(ii)] and Rule 34b-1 permit the inclusion of performance information in investment company sales material. If performance information is included, Rule 482 requires disclosure of the fund’s maximum sales charges and its average annual total return for the most recent one-, five- and 10-year periods, as of the most recent calendar quarter.
Portfolio Visualizer compares All-Cap PRWAX with the total stock market (e.g. VTSMX). PRWAX comes up short in the alpha department in one of those standard time frames (each of which terminates on the quarter ending March 31, 2023), and over its lifetime. Click on the "Metrics" tab for the alpha figures:
PV 1 year (April 2022 - March 2023): alpha = -1.87; S&P 500 alpha = +1.00
PV 5 year (April 2018 - March 2023): alpha = 3.66; s&P 500 alpha = 1.00
PV 10 year (April 2013 - March 2023): alpha = 3.39; S&P 500 alpha = 0.78
IMHO YTD is meaningless, but for completeness PRWAX underperformed both VTSMX and VFINX YTD (using standardized period, i.e. through March 31st). It also underperformed VFINX YTD through April 17th.
I owned several Nicholas funds way back, when we lived in Milwaukee. I got a bit concerned when Al brought son into firm and it was obvious he was going to inherit the mantle. He may have been a genius but family is no way to pick best manger going forward.
I did keep my Mutual Shares for years and stayed on even after Price left.
This is one additional problem with active management. The funds that work do well, amass capital gains and there may be a serious tax bill when the manger
1) retires ( Nicholas) 2) decides to spend all his money ( Price) 3) gets fired for doing a great job but not what company wants (Vinik) 4) Serious mid life crisis (Gross)
Comments
While alpha purports to quantify this sense of outperformance, it has a number of flaws, starting with Investopedia's definition. When a fund's performance is regressed against an inappropriate benchmark (such as calculating alpha of a sector fund by comparing it to the "broad market") the result is meaningless (low R²).
In case there's any uncertainty that by "broad market" Investopedia means the investible universe, it removes all doubt when it says that "there is no way to systematically earn returns that exceed the broad market as a whole." That's true only if it is impossible for a fund to fish outside of the "broad market", i.e. if the broad market includes "everything".
Yogi alluded to this problem, noting that with Zacks one often doesn't know what the benchmark is.
Timeframe is another problem with alpha. Lewis implicitly flagged this in pointing out that fund performance is typically inconsistent. While I generally like using standardized time frames, for statistics like alpha and beta complete market cycles would seem to give more meaningful figures.
FWIW, PRWAX beats the S&P for ALL SIX YTD-to-Life interim periods. We are current and LT holders of PRWAX (drumroll) because of its alpha and those results. https://www.finra.org/sites/default/files/NoticeDocument/p017302.pdf
Portfolio Visualizer compares All-Cap PRWAX with the total stock market (e.g. VTSMX). PRWAX comes up short in the alpha department in one of those standard time frames (each of which terminates on the quarter ending March 31, 2023), and over its lifetime. Click on the "Metrics" tab for the alpha figures:
- PV 1 year (April 2022 - March 2023): alpha = -1.87; S&P 500 alpha = +1.00
- PV 5 year (April 2018 - March 2023): alpha = 3.66; s&P 500 alpha = 1.00
- PV 10 year (April 2013 - March 2023): alpha = 3.39; S&P 500 alpha = 0.78
- PV lifetime (Oct 1985 - March 2023): alpha =-0.09; S&P 500 alpha = 0.47
IMHO YTD is meaningless, but for completeness PRWAX underperformed both VTSMX and VFINX YTD (using standardized period, i.e. through March 31st). It also underperformed VFINX YTD through April 17th.I did keep my Mutual Shares for years and stayed on even after Price left.
This is one additional problem with active management. The funds that work do well, amass capital gains and there may be a serious tax bill when the manger
1) retires ( Nicholas)
2) decides to spend all his money ( Price)
3) gets fired for doing a great job but not what company wants (Vinik)
4) Serious mid life crisis (Gross)
At least it is entertaining!