Q11, p.109, CFAI vol 6. Investment markets are highly competitive and professional investors now dominate the marketplace. What should the average performance of all investors be, compared with market indexes? If international investment mgrs, as a group, beat some national market index, what does it tell us about the performance of local investment managers? Would you reach the opposite conclusion if international managers underperform, as a group, relative to some local market index? - sticky
if intl managers beat the national mkt index, then the local investment managers must have lost money. (superior gains even after factoring in higher transaction costs). if the international managers lose money, it does not necessarily mean that the local investment managers beat the intl managers as they can both lose money. this is because of the transaction costs that intl managers pay are higher so net of costs both the intl and local managers can lose money.
billwest Wrote: ------------------------------------------------------- > if intl managers beat the national mkt index, then > the local investment managers must have lost > money. (superior gains even after factoring in > higher transaction costs). Why? It seems to me that irrespective of the performance of international investors, local investment mgrs are always underperforming the market indexes — simply due to transaction fees. - sticky > if the international managers lose money, it does > not necessarily mean that the local investment > managers beat the intl managers as they can both > lose money. this is because of the transaction > costs that intl managers pay are higher so net of > costs both the intl and local managers can lose > money.
transaction costs are higher for intl manager
billwest Wrote: ------------------------------------------------------- > transaction costs are higher for intl manager sorry but I still don’t understand. average performance < market index performance (due to transaction cost) Now, if intl mgr performance > market index peformance, how does that imply that local investors performance < market index performance? More help on this appreciated. - sticky
Aren’t we talking about averages here? On an average, portfolio managers - local or international - underperform the index net of fees. If international managers on an average are outperforming, the local managers must be underperforming. This underperformance could be significant as international manager would have higher transaction costs vis-a-vis local managers. If international managers are underperforming, the local managers could be underperforming or outperforming. However, even if local managers are outperforming, their outperformance may not compensate for international managers’ underperformance. Why would someone ask this kind of a question. It has nothing to do with PM.
CFAAtlanta Wrote: ------------------------------------------------------- > Aren’t we talking about averages here? > > On an average, portfolio managers - local or > international - underperform the index net of > fees. > > If international managers on an average are > outperforming, the local managers must be > underperforming. ok I must have missed something very important here. How come if international managers on an average are outperforming, then “the local managers must be underperforming” ? What is the reasoning behind? - sticky
I think the key word most people on this thread are basing it off is “average”. If one set of people beat the average then the other set have to underperform.
Lets make it more simple. Investing is a ZERO SUM game but instead of equating to zero, the zero sum is actually equal to the market returns. If i buy a stock, that means somebody else sold it. So either I made money or i lost money and someone else “made” money cuz they sold it or they lost it. Since the markets as a whole are a zero sum game then: International manager returns + Domestic Manager returns = market returns IF internation managers are outperforming, then domestic managers must be underperforming in order for everyone to return the market average.
got it. Thanks guys! - sticky