Louisiana State University professor of finance Don Chance is visiting Australia to give guest lectures at Macquarie University.
Speaking to InvestorDaily, Dr Chance said long-term active manager performance becomes much less impressive when it is broken down into subsections.
The problem is that managers tend to ‘average out’ the amount of beta in the portfolios over time, when in fact it could be 1.1 in the first year and 0.9 in the second year, he said.
“If you look at the long-term period, if your beta is just a bit off you’d be surprised at how much you can actually be off in terms of estimates of your alpha,” Dr Chance said.
“If you can push that beta a little bit lower than it actually is, your actual performance will look a little bit better,” he added.
“Money managers will just about kill for an extra basis point or two. I mean that could mean a lot of money for them,” Dr Chance said.
However, he was quick to point out that fund managers are not necessarily “manipulating” anything or being dishonest.
“We’re just saying that … the beta for the full period is not an average for the sub-periods,” Dr Chance said.
He used Warren Buffet’s performance over the 32 years between 1980 and 2012 as an example.
“We looked at his performance over that whole period and it looked just outstanding. It was completely off the charts,” Dr Chance said.
“But we looked at his performance in the sub-periods – we broke it up into eight-year sub-periods and it was considerably less impressive,” he said.
While the Berkshire Hathaway ‘A’ stock did well over the first eight-year period, it was less impressive in the subsequent periods, Dr Chance said.
“Here’s someone that looks good over a long period of time but over sub-periods they’re not so great,” he said.
“So one of the things I strongly recommend is to look for consistency. For money managers doing a good job, they need to be a consistent winner over various sub-periods,” Dr Chance said.
