EC Where’s The Alpha?

Looking back … and forward

If you’re looking for category winners in the tables above, you’re likely to be drawn to the Invesco XMMO and the Invesco GTO funds. XMMO, in addition to being the top alpha producer, earns the best information ratio in the equity table. A fund’s information ratio reflects its payback for undertaking active risk. Here, a lean toward smaller momentum stocks was the ideal broth for cooking up top-notch alpha.

GTO didn’t produce the highest alpha coefficient in the fixed income table; that distinction was attained by the longer-duration BAB fund. GTO, however, generated sharply higher Sharpe and information ratios than BAB. As GTO is a direct competitor to the benchmark BND portfolio, these stats are compelling.

Over the past three years, equity funds with a tilt toward smaller-cap issues and fixed income portfolios bending toward higher quality have been the most successful alpha producers.

But what about the future?

For stock funds, positive exposure to both size and value factors are trending up and likely to be associated with alpha generation going forward. Alpha momentum on the fixed income side belongs to zero duration portfolios, especially those with positive exposure to the term premium.

It can be argued that these trends are manifestations of ever-increasing investor concerns about market uncertainty. It’s a persuasive case. While there’s still a bias toward equity, volatility fears—especially of interest rate volatility—are compelling investors to look at ways to mitigate risk. Not eliminate risk, mind you, but rather, to bolster risk-adjusted returns, i.e., alpha.

Perhaps that’s a recognition that being too cautious may be the greatest risk of all.

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Disclosure: None.

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