The new buzz word in the funds management world is “alpha”. Many financial journalists are printing stories on the search for alpha. Fund managers seek it here and seek it there but, like the yeti, they rarely find it. But what is this mysterious alpha? The ASX has done a good job of explaining it:
Alpha
A numerical value indicating a manager's risk-adjusted return relative to a benchmark. The value alpha is the measure of the performance of a fund over the index. Alpha represents the expected rate of return for the fund when the rate of return for the index is zero.
Basically the alpha is the out performance in relation to the benchmark index, which in the case of the A-REIT sector is the S&P/ ASX 300 A-REIT Accumulation Index.
Whilst PIR does not make buy, sell or hold recommendations, it does currently rate the outlook for each A-REIT from one to three stars. PIR constructs a hypothetical portfolio (PIR Value Investor) based on those recommendations. It is the performance of those recommendations that determine the alpha of the PIR Value Investor. PIR constructs the portfolio on a monthly basis of the top six A-REITs based on PIR's outlook for those A-REITs in relation to the overall property market. The portfolio has an equal weighting (amount) to each of those six A-REITs. This strategy has its pros and cons.
In constructing the portfolio this way the PIR Value Investor will underweight the portfolio in relation to the heavyweights in the index and overweight the portfolio in relation to the smaller cap A-REITs in the index. Thus the portfolio should under perform in relation to the index when a heavyweight performs well but should out perform when a heavyweight suffers a fall.
This is not a strategy undertaken by most investment professionals - those fund managers who are searching for alpha and generally not finding it whilst taking their management fees. These professionals tend to hold weightings in A-REITs in closer ratio to index weightings. However, the proof of theory over reality is in the alpha.
The graph shows the performance of the PIR Value Investor in relation to the benchmark index. The gap between the bottom line on the graph (the S&P/ASX 300 A-REIT Accumulation Index) and the top line (PIR Value Investor) is what the investment professionals have been seeking and failing to find; the alpha.
