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The Greatest Return Stories Ever Told

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The Greatest Return Stories Ever Told 

In this article, the authors document the performance of the best 40 funds during the periods January1980 to March 2000, ranked by their historical Sharpe ratio.

They use data from institutional composites, institutional separate accounts, mutual funds, from Berkshire Hathaway, The Ford Foundation, the endowment of Harvard University and various hedge funds.

They calculate for each fund:

-          the Sharpe ratio

-          the Information ratio (relative to a benchmark)

-          the CAPM alpha (the market portfolio is assumed to be the S&P500)

-          the Treynor ratio (excess return over the risk free rate divided by the beta)

-          the style-adjusted alpha

-          the market beta

-          the alpha t-statistic

-          the beta against the size factor (from the Fama and French factors)

-          the beta against the value factor (from the Fama and French factors)

For each fund, they identify a customized benchmark to calculate the information ratio. They use quarterly returns.

The best fund over their period is the BGI TAA (note that two authors are from BGI – Kroner and Clifford, and one is from the Ford Foundation - Siegel): BGI TAA delivers an average annual return of 17.30% with a Sharpe ratio of 0.906.

The authors investigate in more details:

-          Berkshire Hathaway,

-          The Magellan Fund,

-          The Ford Foundation,

BGI TAABerkshire Hathaway produced the highest CAPM alpha (8.50%) over the period but an average Sharpe ratio (0.787) amid the top 40 funds. Berkshire Hathaway’s average return was 28.99% per year.The authors note that the performance was strong till 1998 except for a falloff in 1989 and deteriorated between 1998 and 2000 when value stocks underperformed.

Peter Lynch managed the Magellan fund for Fidelity Investments from 1977 till 1990. The Sharpe ratio of the Magellan fund was the highest over the period 1977 to 2000 but most of the performance happened from 1977 to 1983.

The BGI TAA used modern techniques for portfolio management and managed to produce impressive returns. Compared to its benchmark 60% S&P500 and 40% Fixed income), it outperformed till 1983, underperformed till the crash of 1987, was relatively flat and uneven till 1998 and outperformed strongly till the end of 1999.

The Ford foundation had traditionally a growth bias in its portfolio (45% S&P500, 15% MSCI EAFE 35% bonds 5% cash) till the bear market of 73-74. After a period of conservative investment, it regained its edge thanks a large cap growth strategy and a private equity program.

The authors also discuss the performance of George Soros Quantum Fund (strong performance over a 30-year period, less so during the sample 1985-2000), Julian Robertson’s Tiger Fund (strong performance over May 1980-March 2000 with a Sharpe ratio of almost 1), Elliott Associates (low risk fund) and John Neff’s Windsor Fund (a small-cap fund).

The authors conclude that it was possible to generate alpha using different styles and methods. One could expect to observe some managers who can deliver alphas of 100 basis points over a long period.We find this article interesting by its richness of data but maybe a bit self-serving with the selected period that happens to put BGI TAA at the top of the ranking.  Nontheless, it was a remarkable performance over a 20 year period.

Kenneth F. Kroner; Laurence B. Siegel; Scott W. Clifford , “The Greatest Return Stories Ever Told”, THE JOURNAL OF INVESTING, Summer 2001http://www.iijournals.com/JOI/DEFAULT.ASP?Page=2&ISS=8234&SID=319466

 

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