Tag Archives: dispersion

Be Careful What You Wish For

One of the few things more reliable than active managers’ general run of underperformance is their confidence that, despite what happened last year, this year will be different.  Two years ago, e.g., active managers were arguably poised to excel because correlations had declined from their financial crisis peaks; a year ago it was active managers’ putative ability to Read more […]

The Sources of Volatility and the Challenge for Active Management

If we needed a reminder of the continuing volatility of the world’s financial markets, the first weeks of 2016 obliged us by providing one.  What’s often overlooked, especially when volatility spikes, is that there are two distinct sources of volatility.  Understanding them can not only enhance our appreciation of market dynamics, but also provides some important insights for Read more […]

Countdown to Tomorrow

Tomorrow the Federal Reserve is expected to raise its benchmark Federal Funds rate by 25 basis points  — the first increase in seven years.   This increase, assuming that it comes, must surely rank among the Fed’s most advertised and anticipated moves ever, and Wall Street trading desks are ramping up in expectation of heightened trading volumes.   We have Read more […]

The Outlook for Active Alpha

Aficionados of our SPIVA reports will recognize that most active managers underperform passive benchmarks most of the time.   For example, between 2000 and 2014,  a majority of large-cap U.S. managers beat the S&P 500 in only three calendar years.  The records of mid-cap managers against the S&P MidCap 400 and small-cap managers against the S&P SmallCap 600 are equally undistinguished. Read more […]

The bad kind of volatility?

Markets across the globe were rocked by volatility from sources new and old last month. The old was a play-by-play repeat of the “taper tantrum” as capital fled from emerging markets in anticipation of a September date for the first rise in U.S. rates since 2006. The new was triggered by evidence that the rollercoaster Read more […]

What Rising Rates Won’t Do

Here is a dramatic chart: It provides a complete history of the trajectory of interest rates over the last sixty years—and also the backdrop for why there’s so much ado about rates today.  It also explains the consensus sentiment that there is only one direction for interest rates to head. We have no desire to enter the pervasive Read more […]

Rising Dispersion and the Value of Stock Picking

The U.S. equity market’s dispersion rose substantially in July, ending the month at 7.3%, well above June 30’s 4.5%.  Dispersion for the S&P MidCap 400® and S&P SmallCap 600® likewise rose in July, and the component correlation of all three indices declined.  This is not surprising in a month dominated by individual earnings announcements.  Lower correlation Read more […]

Active Share: Not Necessary, and Definitely Not Sufficient

The concept of active share was introduced several years ago as a measure of the degree to which a portfolio of stocks differs from its benchmark.  One of the intriguing results of the initial research on active share was that high active share managers seemed more likely to outperform than low active share managers.  This led, predictably Read more […]

Sector Dispersion and Active Management

Market volatility is a function of both dispersion and correlation, as shown in this schematic: Dispersion measures the degree to which the components of an index perform similarly.  If the components are tightly bunched, dispersion will be low and, other things equal, the index’s volatility will be low.  Correlation is a measure of timing; it measures Read more […]

Dreams to Sell

If there were dreams to sell, a poet asked, what would you buy?  Much more prosaically, if you could design your dream investment process, what would it look like? A simple way to think about the question is to separate success into two dimensions: frequency and magnitude.  Frequency means how often we “win” (i.e., how Read more […]