There are around 30 funds in the UK retail fund universe that use ‘alpha’ in their name while some reports encompassing offshore funds suggest there have been some 170 such portfolios launched in the last three years.
Several more funds about to join the club come from Standard Life Investments, Insight and Schroders. SLI intends to rename its growth & income fund as the UK equity high alpha fund from October 15 while Insight plans to change its global equity and European offerings into global alpha and European alpha towards the end of the year. Schroders is looking to add to its existing alpha range with the addition of a Pacific alpha portfolio.
Considering the many thousands of funds that are available in the UK, the number using the description “alpha” is quite low although anyone reading the trade papers might think this figure should be a lot higher. Alpha has been a buzzword of recent years, used not only in the names of funds but as a description of fund managers’ ability.
Alpha, in financial terms, is used to mean outperformance of a benchmark. Wikipedia says it gained popularity in usage in the latter part of the 20th Century after it was observed that 75 per cent of managers were not providing returns higher than if they tracked the index.
Technically speaking, alpha is a risk-adjusted measure of excess returns over an investment base like a benchmark and is commonly used in reference to highlight the added value an active manager can give in managing investments. Bottom line is that alpha is what active fund management is supposed to be about.
Looking at existing alpha funds, however, the performance is quite mixed, with many sitting at the top of their peer group while others languish at the bottom.
Over the three months to September 18, only a third of the portfolios listed in the Investment Management Association sectors using alpha in their title were in the top quartile of their respective peer groups. This does not include the unclassified sector where several alpha funds reside.
Of the 14 listed in the UK all companies sector, only four were top quartile. Over this same time frame, the fund made popular during the late 1990s boom, Manek growth, is not only top quartile but number one among its peers. It gained 4.6 per cent over the three months to the middle of September compared with the -6.8 per cent average among the 304 funds in the sector.
The longer-term track record is not a whole lot different, with one-year returns to the same end date also showing top-quartile returns from just four out of 14 alpha funds. However, there is only one overlap between those in the top quartile over three months and those over 12 months – SVM UK alpha. Only eight of the alpha portfolios have three-year track records and, of these, four are in the top quartile of their sector.
Alpha as a fund name is an interesting choice but it is hard to get away from the stigma of a marketing ploy. The average consumer is unlikely to understand what it is supposed to mean as it hardly describes what the fund does, unlike names such as opportunities, growth, value or mid-cap. The use of the word alpha is more about what the fund is aiming to do – provide outperformance, which is what most active managers are aiming for, anyway.
Yet despite the desire to be seen as a high alpha fund, the industry has yet to produce a consistent portfolio that does just that. According to data from Morningstar, the average alpha score in the UK all companies sector, using the FTSE All Share index as the benchmark, was negative over three months, one year and three years to October 8. In fact, the SW index tracker fund posted a positive alpha and was ranked sixth out of 304 over three months to the same end date.
There is not a lot of difference with the funds that use alpha in their name. Over the three months to October 8, only two of the 14 alpha funds in the UK all companies sector achieved a positive alpha score, according to Morningstar data. Over one year, five achieved a positive score and two did not have sufficient track records.
Alpha has become a well used, if not overused, expression to describe what a fund manager is doing. Expressions such as seeking to add alpha, alpha generating and alpha producing are all seen quite often today, peppered throughout marketing literature, fund descriptions, presentations, speeches and so on.
But when putting forward questions to fund managers on how they are adding alpha, perhaps it could more plainly be asked: “What are you doing to justify your 1.5 per cent annual management fee?”
Fees paid for actively managed funds are supposed to be for the added outperformance or excess returns a manager may provide over and above a benchmark, otherwise a tracker would be a sufficient investment. Does that not mean that all active fund managers should be adding alpha?