We’re Getting Better All The Time

When we do our year-end review with clients, a bulk of the conversation is about the performance of the systematic portfolio built by Alpha Theory versus the client’s actual returns. The conversations are always informative but, as you might imagine, the systematic portfolio doesn’t always outperform. We did some recent analysis to understand the frequency of systematic portfolio outperforming.

We started by looking at individual positions and took all positions, all time, all managers and simply looked at the lifetime returns of the security in the actual and systematic portfolio. In this case, the systematic position outperformed 55% of the time. That’s a pretty good batting average.

We then rolled that up to the analyst level. For analysts with at least 10 positions over time, the hit rate rose to 66%. Said another way, the analyst would have been better off 60% of the time if they would have sized all of their positions using the systematic method versus what actually occurred.

The next step was to roll up to the client level and simply comparing the return of the actual and systematic portfolio. The first cut was by year. In any given year, a fund has a 67% chance that the systematic portfolio will outperform its actual portfolio.

Then, we rolled it up for each client on an all-time basis. For example, for a six-year-old client, we would compare their six-year actual and systematic portfolio returns. In this case, the systematic portfolio outperformed 76% of the time.
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Finally, we rolled all clients together into an actual and systematic portfolio over our clients’ nine years of historical data. 100% of years, the systematic portfolio outperformed.
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All Funds All Time – 100%

All Funds By Year – 100%

By Fund All Time – 76%

By Fund By Year – 67%

By Analyst All Time – 66%

By Ticker All Time – 55%

This data is starting to resonate for clients as the correlation between actual and systematic has increased over time. In 2015, the average correlation was 35%, today it is 57%. The difference between 57% correlation and 100% is why there is a difference between the actual and systematic. The challenge is that the systematic portfolio requires diligence and higher trading activity than typical for our uber-fundamental managers. The best solution may be a hybrid where the fundamental manager does what they do best, fundamental research. Then a systematic overlay is applied to construct the portfolio, manage risk, and ensure the best execution. And, so, we’ve decided to partner with our clients and build that strategy through CenterBook Partners. We look forward to sharing more about it as it develops.

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