Page 114 - Profile's Unit Trusts and Collective Investments 2021 issue 2

Investment Risk

Chart 6.2 Chart 6.3
Period The Risky Co. Ltd. TheStableCo. The Risky Co. Ltd
%returnfor Ltd. % return for
period period
return
1 16.36 14.48
2 15.05 15.40 % return lower
3 16.55 13.92 upper
4 15.34 14.92 average
5 18.78 14.95
6 13.46 13.89 period
7 12.12 14.31
8 12.82 16.17 Chart 6.4
9 15.96 15.05 The Stable Co. Ltd
10 16.86 14.70
11 12.15 14.37 return
12 11.70 14.27 lower
13 17.31 16.14 % return upper
14 15.65 15.90
average
15 13.03 13.51
16 14.87 13.79
17 12.96 15.17 period
18 15.74 14.86
19 13.27 14.74 Alpha
20 16.21 16.12 By introducing stock picking risk and other
fund manager risks, active fund management
Average return 14.81 14.83
often increases the overall riskiness of a fund – at
Std deviation 1.94 0.79
least compared to its benchmark. (Sometimes, of
course, active fund management can decrease riskiness, although this is less common.)
Alpha is a risk-adjusted measure of the active return of an investment. Technically, it is the
difference between an investment’s expected return, based on its beta, and the actual returns
achieved. Hence alpha can be thought of as the value that the fund manager contributes to the
investment return. Of course, alpha can also be negative (ie, when a fund underperforms its
benchmark). A positive alpha of 1.0 means that a fund outperformed its benchmark by 1%, but
note that not all funds that outperform their benchmarks have positive alpha – a fund with a very
high beta can have negative alpha even though it has outperformed its benchmark. Also, because
alpha uses beta to predict expected returns, the alphas for funds with identical returns but
different betas will not be the same.

Attribution Analysis
Performance attribution, or attribution analysis, refers to various techniques designed to work
out the causes of a portfolio’s active return.
For example, on the assumption that portfolio returns differ from benchmark returns mainly
because of asset allocation, stock selection and market timing decisions, attribution analysis
typically seeks to apportion the active return to these different effects. In other words, performance
attribution analysis tries to explain how much of the active return was due to the different type of
investment management decisions made by the fund manager.
The goal of attribution analysis, over time, is to evaluate the skills of fund managers and to
differentiate performance that is the result of luck rather than good judgment.

112 Profile’s Unit Trusts & Collective Investments — Understanding Unit Trusts