I have been thinking about an intriguing issue: Where do returns come from?
No, not which Fama-French factors are a source of outperformance, but rather, in the real world, what is it that leads any given portfolio to achieve a satisfactory level of returns relative to all of the surrounding events?
Its a nuanced and intriguing question, one that I have been thinking about a lot lately.
I created my own list — check back here this afternoon to see it — but then asked some of the smartest people I know for their views.
It was an intriguing exercise. You can see some representative answers after the jump…
I think in this order…
Capital market returns
Asset allocation
Investor behavior (we calculate about 1.5-2% annual drag from typical investor behavior)
Fees
Security selection
-Large Index Wholesaler~~~
Timing – Hedge fund manager
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That depends on the portfolio and the time frame. If we focus on the S&P 500 as a portfolio, then its long-term return is driven by the trend growth in earnings, which has been 7%. A portfolio of high-quality dividend stocks will have more of its return driven by dividends over time. Of course, then there is the alpha/beta story.
-Market Strategist
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In the short term, news (new information not previously widely anticipated)
In the long term, exposure to the broad market (and hence economy) (“beta”)-Professor (Nobel Prize winner)
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Dividend yield + earnings growth +- change in valuation multiples.
-Private Equity investor
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Gonna keep this as broad/general as possible so it applies to HFT all the way up to Warren Buffett 20 yr hold investing.
Risk — earn payment for taking on the risk of losing your ass.
Front-running expectations — earning payments for winning the Keynes beauty contest.-Quant manager
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Buying things that go up in price after you buy it along with the dividends generated by what is bought.
-Fund Manager
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For stocks, economic growth and current valuation are key factors
driving return.For bonds — Treasuries, in particular — it’s largely a matter of
inflation expectations.REITs arguably are subject to a mix of the factors that drive stocks and
bonds.For commodities, it’s all about supply — expectations about supply.
For portfolios comprised of all of the above, it’s a mix of the factors
just outlined.-Portfolio Analyst
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Risk
-Statistician
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