Like Howard, I could acknowledge that many domestic equity funds do not stick strictly to style boxes and may even have some foreign exposure. But, isn’t choosing some foreign stocks part of the skill managers might have? After all, aren’t stocks, stocks? Is where a company locates its headquarters really moving it between asset classes? Chrysler has moved back and forth from foreign and domestic several times over recent years. It is still a company trying to make profits and has since moved to another invented asset class, “private equity.” There are foreign stocks in many domestic equity funds, so maybe we should benchmark all equity funds, of all types, against a World Equity benchmark? Why choose an easy benchmark that is just one box in the style box matrix Howard and I both hate so much?

Of course, based on the random noise of Howard’s alpha analysis relative to the S&P500 in his “alpha slope,” he would not like the results of such a comparison to World Equities. (Incidentally, I do not see where Howard calculated the r-squared of his randomly bouncing alpha dots to see if his trendline was statistically significant.)  Howard would likely complain that World Equities is bad benchmark for domestic equity funds, yet he would still automatically credit all domestic funds that had some foreign exposure as being “skilled.” Likewise, small cap funds are skilled for beating the S&P500, which somehow is a good benchmark for them.

Expanding the universe to be all equity funds of any flavor against global equities we find only 27.27% beat the index for return and only 29.59% have less risk. Now, as an objectivist, I’m not going to state this means anything other than over the measurement period observed, foreign stocks generally did better than domestic and the universe was statistically over populated with a lot of funds that had little to no foreign stocks relative to the World Equities benchmark. Like Howard’s “increasing alpha slope research,” it does not mean anything of any value. This is no different than Howard’s universe that had the vast majority of the funds populating the universe that were something other than large blend.  The only difference is Howard’s mismatched benchmark made alpha look easy and my mismatched benchmark is an idiotic example that made it look hard. Both are still idiotic. Neither are good measures of anything other than noise. Shouldn’t we acknowledge that it is equally misleading to compare a bunch of funds that are not large cap blend funds to an easy to beat large cap blend benchmark? C’mon…toss your critics a bone here and admit it.

And where did all of this series of debates begin? Advisor Perspectives started the debate by publishing an article about Wermers’ research that attempted to statistically measure how much skill and how much luck existed in a universe. Howard followed with an article that criticized Wermers’ objective piece supposedly showing growing skill based on past performance of funds relative to a recently easy to beat (and mismatched benchmark), the premise thereof assumed luck does not exist. I, among several other letters to the editor, exposed the slippery slope of comparing apples to oranges and the assumption in Howard’s analysis that ALL outperformance was skill, and luck cannot exist at all. Howard’s response completely evaded the benchmark mismatch (maybe he has some rationale for using one box in the style box matrix he hates?) and merely commented that luck exists while his alpha slope assumed luck does not exist. He uses this alpha slope as “evidence” skill is increasing despite acknowledging that luck exists in his response to my letter.

Neither Wermers nor I said skill does not exist.  In fact, both of us said it probably does. Neither of us stated there is a small or value premium, as Howard pontificated as the basis of the style boxes I used in my initial response to him, yet ignored that many managers themselves self select as benchmarks for their funds. The bottom line concept is that all we said is luck exists, analysis attempting to identify skill should include this fact too instead of ignoring it.  So, Howard does have to worry about sailing off the end of the earth. It might look flat when compared to the S&P500 horizon, but the convoluted math that proves it is round is real science.  

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