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February 05, 2021
Analytic Investors Team, guest contributor
On February 2, 2020, the Kansas City Chiefs came back to defeat the San Francisco 49ers 31-20 to win Super Bowl LIV in Miami. This is notable on many levels: It was the Chiefs’ first Super Bowl title in 50 years; young superstar quarterback Patrick Mahomes led his team to three touchdowns in the final 6 minutes and 13 seconds to erase a 10-point deficit; and the Analytic Investors team correctly predicted the outcome for the second consecutive year, bringing its historical record to an impressive 12-5 (71%) against the spread.
In the next few years, a client’s evaluation of their advisor will boil down to the professional’s ability to do two things: add alpha and keep them invested. True, these have always been core components of an advisor’s role, but in the coming years they will take on added significance.
Why? It’s a function of a low-return environment, and the psychological roller coaster that is likely to unfold.
While the term “alpha” is widely used, in our experience, it’s not particularly well understood. Alpha, properly defined, is return in excess of what could have been expected given the risks assumed to generate the returns. Notice that this is not strictly outperformance relative to a benchmark, but rather, its relative performance given the level of risk taken.
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1. See for example http://on.wf.com/6120GIkRs
2. The active exposures are shown in Z scores, which are standardized units that are measured in terms of standard deviations from the mean.
3. “All that Glitters: The Effect of Attention and News on the Buying Behavior of Individual and Institutional Investors,” by Brad M. Barber and Terrance Odean, Review of Financial Studies, Vol. 21, No.2, pages 765–818, 2008.
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