When it comes to chasing alpha in today’s market, the new mantra should be “less is more,” according to an expert.
Speaking at the Stock Market Crash and the Return of Alpha event in Toronto on Tuesday, Saker Nusseibeh, global head of equities with Fortis Investments, explained that fund managers should focus on simplicity for the foreseeable future, as the trends and rules of the pre-2008 marketplace no longer apply.
“When we’re talking about the return of alpha, we’re talking about the return of good old-fashioned stocks,” said Nusseibeh.
Prior to the stock market crash of 2008, the market system was highly predictable and had an accommodating monetary policy, he explained. Long-term trends fed into one another, and the strength and sustainability of the underlying building blocks—such as the U.S. housing crisis and growing trade imbalances—were overestimated.
It was in this environment, Nusseibeh continued, that managers were looking the performances in trends, sectors and countries—and not considering individual stocks.
In his view, managers should follow the “less is more” principle. Less beta (that is, less complexity, less leveraging and less trend-spotting) means more alpha (more emphasis on individual stocks and more hard work).
Even the size of the portfolio should be considered. With more than 50 stocks, a fund manager is diluting his or her stock-picking ability, explained Nusseibeh. “And, there will be more risk with 100 stocks than with 50.”
Long-only portfolio managers should implement risk control and risk management, said Nusseibeh. And lastly, he stressed, they should understand what their clients want.
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