If Wired magazine readers would have a liking for financial fiction, the six-word headline of this article would be a featured story for various reasons. First; 30 year annualized returns for S&P 500 have been around 10% and it required buy-hold and forget from the 1990s. Second; Warren Buffett and a handful more have delivered 20% for a similar period. Third; The Market Capitalization benchmark building method directs more than $10 trillion globally with Index Funds, Mutual Funds, ETFs, and other instruments.

The word “excess” is rarely used and seen in real investment management and is relegated more to financial theory. In simple words, the risk-weighted excess returns are the returns at a similar risk above the appropriate benchmark [not just S&P500].

If 9 out of 10 active managers fail to beat the market, the probability of a manager delivering near 10% above the actual return of 10% [i.e. 20% annually over 30 years] is 0.00000001% [assuming there is one Warren among 10 billion economic men]. There may be claims that there are more like Warren, but then there isn’t enough data to understand leverage, mandates, risks, attribution, etc.

So to expect a scientific, systematic, replicable, testable, open method that is passive like an indexing methodology, deliver [on paper] like what Warren has done, without taking idiosyncratic risks, without any discretionary timing, may seem science fiction but then who would have imagined in the bottom of 1932, a century-long bull market [one imagined and wrote about it]. Who would have imagined mutual funds going out of business and something like ETFs calling the shot? Who would have imagined that Index Funds would be taking over Active Investing? Who would have imagined, StarTrek props coming to real life? The future is built from imagination, from science fiction.

Let me show you some financial science fiction.

The table below carries 6 of our Exceptional & Rich [E&R] Smart Beta Model Portfolios with the following nomenclature.

Nomenclature

E&R [Asset] [Number of Components] [Starting Point of the Portfolio]

AR [Annualized Returns]

ER [Annualized Excess Returns]

AV [Annualized Volatility]

EV [Annualized Excess Volatility]

TE [Tracking Error %]

IE [Information Ratio]

Barring the Crypto, which has a crazy ER i.e. 166.60%, beating 10 with the same 10, the U.S. 500, India 50, Canada 60, and U.S. 100 have an ER greater than 10% for the since inception models [starting near Jan 2000]. The Europe 50 has the lowest ER at 5%. And 3 out of the 6 Sci-fi portfolios have negative excess volatility, with an average Information Ratio near 1. Google snippets can show you that the 0.40-0.60 range is considered a good Information Ratio.

So now that we have the sci-fi to create an improbable event, we went a step further and simulated a since inception model for various starting points. The E&R Canada 60 competes with the Canada TSX 60, the same 60, simulated for different starting points, and the sci-fi continues. 6 out of the 12 starting points have more than 10% ER and the other half average around 7% ER.

We know these numbers are unbelievable, too good to be true, insane. This is why we have built this sci-fi world that you can test for yourself, by creating your portfolio, taking our GitHub code and simulating it for yourself, using any third-party validation, or maybe just reading Mukul’s upcoming book, Exceptional & Rich. We are almost there.

AlphaBlock. We Build Machines that Beat the Market.

AlphaBlock Team