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https://investresolve.com/blog/global-passive-benchmark-etf-factor-tilt/

A Global Passive Benchmark with ETFs and Factor Tilts

2014-08-29 09:00:57, , ReSolve Asset Management

Content Categorization
/Finance/Investing

Word Count:
3192

Words/Sentence:
27

Reading Time:
31.92 min

Reading Quality:
Advanced

Readability:
16th or higher

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How might this help to explain the chronic and egregious underperformance of private investors described by perennial Dalbar studies, per Figure 2 (note: red bar is average private investor returns)?

They applied a more rigorous methodology called bootstrapping, which allowed the authors to compare actual mutual fund returns to a distribution of returns which might have been expected purely as a result of random chance.

Source: Goyal and Wahal, 2008

Whatever method these institutions – and their consultant advisors – are using to evaluate, terminate and hire managers, it doesn't appear to work very well on a 3 to 5 year evaluation period.

For example, there are well documented value and momentum factors which might be systematically applied as a portable alpha strategy to improve absolute and risk-adjusted returns, as described in Table 2 from Asness, Moskowitz and Pedersen (2013) (see also here).

Unfortunately however, this raises as many questions as it answers.

So Now What?

While Ellis' prescription to eschew active management for low-cost indexing appears to solve some important problems, his article falls remarkably short on how to implement such an approach.

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