Geoffrey J. Warren

Alpha generation in portfolio management: Long-run Australian equity fund evidence

This study provides the first long-run analysis of the skill of active Australian equity fund managers based on trades inferred from a market-wide database of monthly portfolio holdings over the period 1994–2009. In addition to confirming previous findings that skill exists amongst active Australian managers using a more comprehensive sample, we also deepen the understanding of this skill in two ways. First, we sharpen the identification of skill by categorizing trades. We find that alpha is concentrated in trades that are more likely to involve informed trading rather than portfolio rebalancing. Second, we investigate skill across manager types. Alpha for growth-oriented managers is found to stem from selection skill, while that for value managers appears more related to characteristic exposure. We also find stronger evidence of skill amongst boutique firms relative to more institutionalized managers.

Can Investing in Volatility Help Meet Your Portfolio Objectives

Warren evaluates investing in volatility products under a range of investor objectives, including risk and return at the total portfolio level, benchmark-relative performance, and liability-aware investing. He shows that the potential role for volatility exposure depends on investor circumstances. Long positions in forward variance swaps or longer-dated VIX futures can be effective for hedging equity-related risk within balanced portfolios, but do so at the cost of exacerbating benchmark-relative risk and may be of limited benefit in certain liability-aware situations. Investors best placed to capture the volatility risk premium through shorting volatility include those with higher tolerance for total portfolio and benchmark-relative risk, longer investment horizons, or interest rate–sensitive liabilities.

Equity home bias in Australian superannuation funds

Equity home bias for Australia superannuation funds is examined under a model that reflects observed decision processes. The mix of Australian and international equities is evaluated as a two-asset choice under the influence of legacy, an objective function that trades off expected returns against portfolio risk and peer risk, and under expectations that are formed adaptively and allow for taxation differences. The model closely replicates the observed equity mix, particularly relative to more traditional mean-variance formulations. The main implication is that home bias may be better explained under models that reflect industry practices and allow for various commingled influences. JEL classifications G11, G23

Design of MySuper default funds: influences and outcomes

We interview Australian fund executives about how their organisations responded to MySuper, a regulatory framework for default retirement savings funds that providers were required to have in place by the beginning of 2014. We provide an account of the influences on MySuper product design. Our analysis provides insight into how fund providers balanced their perceptions of the needs of default fund members against business considerations. Differences in member bases and organisational circumstances across funds are found to lead to considerable variation in default fund design.

Why Might Investors Choose Active Management

We investigate why investors may be willing to participate in active management, notwithstanding that the average manager is likely to generate negative alpha after fees. We model the alpha an investor expects from a dynamic strategy of investing in a portfolio of active investment managers, and the fee they are willing to pay for this strategy. The investor considers their ability to select good managers, and anticipates replacing managers when alpha expectations fall either due to a loss of confidence in the manager’s ability or from the dilutive impact of new fund flows. A numerical calibration, using inputs consistent with the literature, finds some investors can credibly select active managers at observed fee levels. Computations suggest that investors who are overly optimistic about their ability to select active managers or overlook the dynamic elements of investing with active managers may incur significant losses.

The Alpha, Beta and Consistency of Private Equity Reported Returns

The reported returns of U.S. private equity funds are benchmarked against passive exposures from public equity markets. Over the full sample period, private equity returns display three factors: market beta of less than one, small transaction size and growth, and a four-quarter lag behind public markets. Buyout funds delivered alpha of about 5.5% per annum; venture capital performed poorly. Closer examination reveals that these estimates are inconsistent over time, cautioning against extrapolation from historical averages.

Capacity Analysis for Equity Funds

This article discusses the definition and determinants of capacity and outlines a practical approach for analyzing the capacity of equity funds. It is argued that capacity analysis should focus on effective capacity, defined as the level of assets under management at which any additional investments would generate alpha below a minimum threshold at the margin, for the active component of a portfolio. The approach combines potential drivers into an integrated analysis and generates insight into the critical factors for the capacity of the strategy being analyzed. The approach is illustrated for a factor-based momentum strategy and an actual equity fund.

Global Equity Fund Performance: An Attribution Approach

We use portfolio holdings data to examine the performance of 143 global equity funds over the period 2002 to 2012. We find that the average global equity manager outperforms their benchmark by 1.2% to 1.4% per annum before fees. Attribution analysis reveals that the prime source of excess return relates to selecting stocks that beat their local markets. Modest contributions arise from country selection, most notably in emerging markets; while currency effects are mixed. Our findings support giving consideration to active management in global equity markets, at least for institutional investors who pay fees below 1% per annum.

In-House Investment Management: Making and Implementing the Decision

We propose a framework that asset owners can use for making and implementing any decision to manage investments in-house. It involves addressing four elements: capabilities, costs, alignment and governance; with key aspects identified for consideration within each element. The framework draws on guidance from the literature, and insights from interviews with executives from the Australian superannuation fund industry. We also report on the interviews, where we uncover striking diversity in the approaches to deciding whether to manage in-house, and the emphasis placed on various aspects related to the perceived benefits, challenges and success factors. Our framework encompasses and unifies the wide range of viewpoints we heard from industry executives. We are supportive of in-house management, provided that the conditions are right and it is implemented appropriately.

The Australian superannuation system post Stronger Super: views from fund executives

Over the past five years, the Australian superannuation system has been subject to a programme of policy and regulatory change of considerable scope and ambition: the Stronger Super initiatives. This article presents the findings of qualitative research undertaken with the fund executives on whom much of the burden of responding to the changes has fallen. It finds misgivings around the new reporting regime, the systems overwhelming focus on the accumulation phase and the provision of choice to members, as well as widespread fatigue from continued regulatory change. It also finds a predictable diversity of views on funds’ alignment with members’ needs and the desirability of scale.