making sense of 100's of funds

Paul,

Sorry for the delay in my reply.

Yes you are looking for funds that produce intercepts that are as
strongly positive as possible when their fund returns are regressed on
the returns to the benchmark. Remember to consider standard errors!
Since we are looking at a risk-adjusted return measure, only a fund
which has a *statistically significantly* positive intercept has a
positive intercept. Sorry if this is obvious to you, but many people
miss it.

For choice of benchmark, the ASX SP200 strikes me as a very good
starting point.

In terms of calculating returns, CalculateReturns (which I have never
used, but just looked at the manual) does not seem to take into account
distributions, which is imprecise. The total one-period return at time t is:

r_t = [Price_(t) + Dividends_(t) + CapGainsDist_(t) - Price_(t-1)] /
Price_(t-1)

Here Price_(t) is the price at time t, Dividends_(t) and
CapGainsDist_(t) are respectively the dividends and capital gains
distributions made by the fund between t-1 and t. The distributions may
be substantial, so they will make a difference. If you use "adjusted
closing" prices from Yahoo Finance, you are OK, as these are adjusted
for exactly that (and splits).

Toby


paul sorenson wrote:

Toby,

Thanks for the tips.  I am somewhat of a cynic also. When it is my own
retirement fund, academic meets real-life in a fairly personal way!  I
have heard figures that something like 98% (from memory) of Australian's
"don't understand superannuation".

I am trying to get myself well into the 2%.  Writing R code leveraging
some of the great packages out there is just a method of learning which
I find works for me.  It can be slow going at times though.

I have picked out 8 funds to crunch through and using the ASX SP200 as
the benchmark for exercising my code.  My "practice" data set is at
http://www.metrak.com/tmp/exitprices.csv and I retrieved the SP200 using
get.hist.quote("^AXJO", start="2002-01-01", quote="Close", retclass="zoo").

I have used CalculateReturns from PerformanceAnalytics to create returns
as zoo objects so hopefully I will be able to calculate the alphas.  If
I understand your comment below, I am looking for a more positive
intercept on my choice of fund compared with the benchmark?

cheers

Tobias Muhlhofer wrote:

Paul,

Unless you are looking at index funds, you need to see whether your
funds produce alpha. To do this, pick a set of benchmarks according to
your fund's style and investment strategy, like Morningstar category
index or something like that (or perhaps just the general stock market
plus the two Fama-French factors), regress the fund's returns on the
benchmark returns, and see whether you have a significantly positive
intercept after fees. This is the best way of measuring systematic-risk
adjusted returns.

Being a finance academic (and therefore a cynic), and judging from my
own research, if benchmarked correctly, very few fund managers generate
positively significant alphas, and so I personally buy index funds for
whatever style I want to invest in, and there I choose the one with the
lowest expense ratio.

Best,
    Toby