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The alpha to beta of it

Here’s something that, despite more years in the investment game than I care to contemplate, I’ve never done before. Perhaps I should have. The results reveal interesting findings about the Bearbull Income Portfolio. You should try it for yourselves with your own portfolio.

The exercise comes under the heading, ‘Assessing a portfolio’s performance’; specifically, via those ubiquitous measures, alpha and beta. These two are thrown around indiscriminately in the investment scene. In crude terms, beta indicates the extent to which a portfolio relies on background forces for its performance; alpha measures how much performance might derive from an investor’s ability. As such, beta is borderline bad because it provides a free ride if the background forces happen to be going the right way or a costly detour if they’re moving the wrong way. Alpha is good because it quantifies how well an investor can find a smooth path through the investment jungle.

So is it a concern that the Bearbull portfolio used to be powered by lots of alpha but has seen that factor fade these past few years? Meanwhile, beta, whose chief function for years was to exert a calming effect on the portfolio’s otherwise good returns, now seems to power it (see the chart). Of course, it’s not that simple and, for starters, let’s strip away the mystery that comes from using Greek letters to describe a bit of investment maths.

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