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tato
larry swedroe
06-03-2007, 4:04 PM | Post #2395352
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1)The model works well only for well diversified portfolios.
2) Here is my take on Lynch. And he had very large alpha which was rapidly disappearing near the end, and IMO that is why he left. He "knew" the game was up---successful active management contains the seeds of its own destruction. Huge cash flows follow great returns and then you either have to diversify more and look like the market (and then the math of closet indexing kills you) or you end up with very high market impact costs.
With Lynch, he was small cap manager in early part of his reign. And he could do that because he had small amount of money. Then by end of 83 he had become the largest fund manager, most dollars. So he could not be small cap manager. So he became a large cap manager. That is what the loadings show. So he was genius who owned small caps in the greatest run for small caps and then had the insight to switch to large when the small game was over? Or was it luck, since he in was forced to become large cap manager.
But to repeat, his alpha even against the 3 factor model was large until near the end. But it was nowhere near as large as his outperforming the market appeared to be (since 75-83 small stocks won big).
I hope the above helps
BTW--In presentation by Fama if my memory serves they found BETA only explained about 2/3 of returns (not 85%) and "worse" is that past beta was not a predictor of future beta (so it was not useful anyway).
Originally posted in thread: 59183
Topics
active management
cash flow
fund managers
Gene Fama
Indexing
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